Summary of Global Business by Peng: 4th edition, with extra short summary and examtips

How should we look at global business? - Chapter 1

What is global business?

What is this paragraph’s learning objective? To be able to explain the concepts of international business and global business, with a focus on emerging economies.

International business (IB) is 1) a business (firm) that engages in international (cross-border) economic activities and/or 2) the action of doing business abroad. An often-used example of 2) is a multinational enterprise (MNE), which is a firm that engages in foreign direct investment (FDI), which is investment in, controlling, and managing value-added activities in other countries. However, global business, meaning business around the globe, is different from IB because it also includes domestic business activities.

Most books on IB focus on developed economies, but this book thoroughly examines emerging economies (or emerging markets), the term that has gradually replaced the term “developing countries” since the 1990s. Emerging economies are relevant for global business because, once adjusted for purchasing power parity (PPP)—an adjustment to reflect the differences in cost of living—such economies make up 48% of world trade and contribute around 50% of global gross domestic product (GDP), which is the sum of value added by resident firms, households, and governments operating in an economy. This is different from gross national product (GNP), which is GDP plus income from non-resident sources abroad. The term GNP has been replaced by the World Bank for gross national income (GNI), but they have the same meaning.

The emerging economies of Brazil, Russia, India, and China (BRIC countries) are most important. Add South Africa and you have BRICS. However, one should be careful in coupling these emerging economies, because they are all different from one another.

The Great Transformation refers to the transformation of the global economy that is embodied by the tremendous shift in economic weight and engines of growth toward emerging economies in general and BRIC(S) in particular. Keep in mind, however, that in many cases the economic growth has started to slow down in these countries.

In viewing the global economy as a three-layered pyramid, the 1 billion people in the top tier (making more than $20,000 per year) mostly people from the Triad, which means North America, Western Europe, and Japan. The second tier (making between $2,000 and $20,000) consists of another billion people. Most people, around five billion, are in the Base of the Pyramid (BoP), which means they live in economies where people make less than $2,000 dollars per capita per year.

Most MNEs have ignored the BoP, but an increasing number has started investing in these countries, contributing to the phenomenon of reverse innovation, an innovation that is adopted first in emerging economies and is then diffused around the world. Most innovations are ­top-down, but such innovations are bottom-up. Reverse innovation is important, because it means that BoP markets are not only low-cost production, but can also offer new innovations.

Why study global business?

What is this paragraph’s learning objective? To be able to give three reasons why it is important to study global business.

There are three important reasons to study global business:

1. Enhancing your employability and advancing your career in the global economy
2. Better preparation for possible expatriate assignments abroad
3. Stronger competence in interacting with foreign suppliers, partners, and competitors, and in working for foreign-owned employers in your own country

The Group of 20 (G-20) is a group of 19 major countries plus the EU whose leaders meet on a biannual basis to solve global economic problems.

An expatriate manager (expat) is a manager who works abroad. Working abroad can be rewarding, because it can offer an international premium, meaning a significant pay raise when working overseas.

What is the book’s framework?

What is this paragraph’s learning objective? To be able to name one fundamental question and two core perspectives in the study of global business.

The fundamental question of the book is: what determines the success and failure of firms around the globe?

The book takes two perspectives in answering this question, the institution-based view and the resource-based view.

This view suggests that the success and failure of firms are enabled and constrained by institutions, meaning the rules of the game. There are two sorts of rules: formal and informal.

Examples of formal rules are laws, regulations, and literal rules.

Examples of informal rules are values defined by cultures, ethics, and norms.

The institution-based view suggests that the success and failure of firms around the globe are largely determined by their environments. This is definitely the case, but the question is: to what extent. Firm performance is not completely determined by environments. This is where the resource-based view comes in, because it does not look at external environments, but with internal environments. Some firms have specific resources that help them succeed.

Doing business abroad means overcoming the liability of foreignness, which means the inherent disadvantage that foreign firms experience in host countries because of their non-native status. Not speaking the language is a good example of this. One example of overcoming this difficulty is good management, which is often the case with MNEs compared to domestic businesses.

What is globalization?

What is this paragraph’s learning objective? To be able to identify three ways of understanding what globalization is.

Globalization is the close integration of countries and people of the world. There are people who are for globalization, who emphasize economic growth and higher standards of living, and people who are critical of globalization, who emphasize the stagnation of wages in rich countries and the exploitation of workers in poor countries.

There are three views globalization.

1. A new force sweeping through the world in recent times
   Globalization is a 20^th-century phenomenon, which is driven by technological innovations and a Western ideology to dominate the world through MNEs.
2. A long-run historical evolution since the dawn of human history
   Ever since the dawn of man, people have created technological innovations which make the world more inter-connected.
3. A pendulum that swings from one extreme to another from time to time

The pendulum view holds that globalization is the “closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of the costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders. It is important to note that globalization, according to this view, is not one-directional.

This view makes the most sense because it helps understand the ups and downs of globalization. Globalization started accelerating after WWII, but between 1950 and 1970 there were several factors that actually impeded integration, such as the Iron Curtain. Then, during the 1990s and 2000s there was rapid globalization, for example with the invention of the internet, but these events were met with backlash, such as the terrorist attacks in New York and Washington in September 2001. In other words, resembling a pendulum, globalization swings back and forth.

Risk management is the identification and assessment of risks and the preparation to minimize the impact of high-risk, unfortunate events.

Scenario planning is a technique to prepare and plan for multiple scenarios (either high- or low-risk).

Globalization is not complete. This is why the term semiglobalization is useful. It entails a perspective that suggests that barriers to market integration at borders are high, but not high enough to insulate countries from each other completely. It calls for more than one way of doing business around the globe, and thus it experiments with several correct business strategies.

What is the global economy and why does your own (biased) perspective matter?

What is this paragraph’s learning objective? To be able to state the size of the global economy and its broad trends, and understand your likely bias in the globalization debate.

The entire global economy is $75 trillion, or $100 trillion when adjusted for PPP. Globalization has led to huge sizes for MNEs: Volkswagen’s worldwide sales would represent 10% of German GDP, Samsung’s sales 17% of South Korean GDP, and British Petroleum’s sales 26% of British GDP. If the largest MNE, Wal-Mart, were a country, it would be the 27^th largest economy.

Such facts have led to an important debate on the pros and cons of globalization. In engaging with this debate, it is important to realize where your biases, as a student, lie. By the very act of taking an IB course and reading this book, you probably already have some pro-globalization baises, compared to non-business majors elsewhere on campus and the general public in your country.

Most executives, policy makers, and scholars emphasize the benefits of globalization—perhaps because they are often part of the elite in societies.

Opponents of globalization, on the other hand, are found in nongovernmental organizations (NGOs), such as environmentalists, human rights activists, and consumer groups. Corporations would make a mistake by ignoring such voices, but should engage with them, instead.

In avoiding a too rosy picture of globalization, this book has significant portions that highlight debates concerning the issue.

How do we understand formal institutions: politics, laws, and economics? - Chapter 2

This chapter focuses on the institutions that can govern various systems of business. It is important to note that these institutions are not rigid, but rather flexible and can change over time. This is called institutional transition, fundamental and comprehensive changes introduced to the formal and informal rules of the game that affect firms as players.

Institutions can determine the success and failure of firms, which is why the institution-based view (see Chapter 1) has ascended as a leading perspective on global business.

How do we understand institutions?

What is this paragraph’s learning objective? To be able to explain the concept of institutions and their key role in reducing uncertainty.

Institutions are the formal and informal rules of the game. Institutional frameworks are formal and informal institutions that govern individual and firm behavior.

Richard Scott has identified three “pillars” which support these institutions, namely the (1) regulatory, (2) normative, and (3) cognitive pillars.

Formal institutions, meaning institutions represented by laws, regulations, and rules, are mainly supported by the regulatory pillar, which is the coercive power of governments. For instance, governments can coerce firms to pay taxes.

Informal institutions, on the other hand, are institutions represented by cultures, ethics, and norms. Norms are values, beliefs, and actions of relevant players that influence the focal individuals and firms. These informal institutions are mainly supported by the normative pillar, meaning the mechanism through which norms influence individual and firm behavior, and the cognitive pillar, meaning the internalized (or taken-for-granted) values and beliefs that guide individual and firm behavior.

One example of the workings of these pillars in shaping behavior:

“In 2008, a year during which Wall Street had to be bailed out by trillions of taxpayer dollars, Wall Street executives paid themselves 18 billion dollars in bonuses. The resulting public outcry was understandable. However, by paying themselves so handsomely, these executives did not commit any crime. Therefore, the regulatory pillar had little teeth. Rather, this was a case of major clashes between normative pillar and cognitive pillar held by these executives. In the minds of these executives, supported by their own cognitive pillar, they deserved such bonuses. What they failed to read was the normative pressure coming from an angry public.”

What is the role of institutions?

The main role of institutions is to reduce uncertainty.

Uncertainty in business transactions can bring transition cost, which is the cost associated with economic transactions or, more broadly, the costs of doing business.

One important factor in transition costs is opportunism, which is the act of seeking self-interest with guile. In other words, misleading and cheating. Institutional frameworks fight this by producing rules and regulations, which prevent such actions.

Again, note that institutions are not rigid. In countries where institutional transitions occur constantly, these countries are called transition economies, a subset of emerging economies.

What is the institution-based view of global business?

What is this paragraph’s learning objective? To be able to name two core propositions underpinning an institution-based view of global business.

An institution-based view thinks of firms’ behavior as the outcome of dynamic interaction between institutions and firms. That is why institutions matter.

There are two propositions here:

1. Managers and firms rationally pursue their interest and make choices within the formal and informal constraints in a given institutional framework.
2. While formal and informal institutions combine to govern firm behavior, in situations where formal constraints are unclear of fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and firms.

With regard to proposition 1, it is important to note that the book speaks of bounded rationality, meaning the necessity of making rational decisions in the absence of complete information. This is because no one person possesses all information in every situation.

With regard to proposition 2, it is important to note that this does not only refer to emerging economies, where there are often less formal institutions than in developed economies. And vice versa, in developed countries with many formal institutions, informal institutions can still be important.

This chapter goes on to focus primarily on formal institutions. Informal institutions will be the focus of Chapter 3.

Which political systems are there and what are the (dis-)advantages?

What is this paragraph’s learning objective? To be able to identify the basic differences between democracy and totalitarianism.

A political system refers to the rules of the game on how a country is governed politically. The book will discuss two main political systems: democracy and totalitarianism.

Democracy is a political system in which citizens elect representatives to govern the country on their behalf. An important aspect for global business is that individuals have many freedoms, such as expression and organization (including setting up a firm).

Totalitarianism is a political system in which one person or party exercises absolute political control over the population. There are several forms of totalitarianism: communist totalitarianism (China, Cuba, North Korea, Vietnam), right-wing totalitarianism (formerly in Argentina, Brazil, South Africa), theocratic totalitarianism (Iran, Saudi Arabia), and tribal totalitarianism (Rwanda).

In general, it is assumed that totalitarianism is not as favorable for business as is democracy, because it often brings certain forms of political risk, meaning risk associated with political changes that may negatively impact domestic and foreign firms. One example would be war, because it generally prevents trade. There is an advantage for businesses in democracies, because they do not wage war with one another.

Which legal systems are there?

A legal system refers to the formal rules of the game on how a country’s laws are enacted and enforced.

There are three legal traditions:

1. Civil law, a legal tradition that uses comprehensive statutes and codes as a primary means to form legal judgments. This form was present with the Romans and Napoleon’s France and is most used in the world.
2. Common law, a legal tradition that is shaped by precedents and traditions from previous judicial decisions. This is English in origin and is used in all English-speaking countries and their (former) colonies.
3. Theocratic law, a legal system based on religious teachings.

In civil law, judges merely apply the law, whereas in common law, judges are free to interpret the law. This makes common law more confrontational, because there is room to influence the judge’s decision.

Theocratic law is only found in Islamic countries (there is Jewish law, but Israel does not follow it). These laws are not necessarily anti-business, but specific practices can be constrained (such as service to women).

What is the importance of property rights?

What is this paragraph’s learning objective? To be able to understand the importance of property rights and intellectual property rights?

No matter what legal system, an important function is always to protect property right, which is the legal right to use an economic property (resource) and to derive income and benefits from it. Property is important because it can provide collateral for credit. Such investments have been key in the progress of developed countries. Without a legal system to protect such property, such investments can be difficult. Simply put, banks will not invest in your start-up if you cannot provide them with collateral in the form of a house that is legally yours.

The term “property” usually refers to something that is tangible, but intellectual property (IP) is intangible property that is the result of intellectual activity. Examples of this are books and videos.

Intellectual property rights (IPR) mainly include rights associated with (1) patents, (2) copyrights, and (3) trademarks.

Patents are exclusive legal rights of inventors of new products or processes to derive income from such inventions.

Copyrights are the exclusive legal rights of authors and publishers to publish and disseminate their work.

Trademarks are the exclusive legal rights of firms to use specific names, brands, and designs to differentiate their products form others.

Usually, one country protects IPR. So how does that work on an international scale? Countries are required to adopt the Paris Convention for the Protection of Industrial Property if they want to enter the World Trade Organization.

One issue with IPR is that it can be difficult to fight piracy, the unauthorized use of intellectual property. Realizing that IPR violators are ordinary people, one should realize that IPR violations should be disincentivized.

Which economic systems are there?

What is this paragraph’s learning objective? To be able to know the differences between market economies, command economies, and mixed economies.

An economic system refers to the rules of the game on how a country is governed economically. There are two extremes: the market economy, and the command economy, with the mixed economy in between.

A market economy is characterized by the “invisible hand” of market forces, as proposed by Adam Smith.

A command economy is characterized by government ownership and control of factors of production. In such an economy, you will find many state-owned enterprises (SOEs).

A mixed economy has elements of both a market and a command economy. Most countries are mixed economies, even though we call many western economies “market economies”. They are not pure market economies, and therefore they are mixed economies.

What are important debates on formal institutions?

What is this paragraph’s learning objective? To be able to participate in two leading debates on politics, laws, and economics.

The first section will focus on the debate on drivers of economic development and the second section will focus on the debate on private ownership versus state ownership.

Generally, there are three major explanations: (1) culture, (2) geography, and (3) institutions.

The culture argument would be that richer countries have smarter and harder-working populations than other countries (derived from the Protestant work ethic proposed by Max Weber). This line of thinking is racist and totally unacceptable.

Those that would emphasize geography as a driver of economic development focus on the luck of countries geographic location and the natural resources they bring with them. It is important to take this perspective in consideration, but it is not a final explanation.

The third perspective, focusing on institutions, is the clearest. According to scholars maintaining this perspective, “institutions are the basic determinants of the performance of an economy” (D. North, 2005, Understanding the Process of Economic Change (p. 48), Princeton, Princeton University Press). Simply put, countries can become rich when they implement good market-supporting institutional frameworks. Generally speaking, the following things work:

• Specializing to gain from trade
• Lack of formal, marketsupporting institutions forces people and firms to trade on a smaller basis
• The formal protection of property rights incentivizes innovation and entrepreneurship.

What are the (dis-)advantages of private ownership and state ownership?

For a long time this debate wasn’t much of a debate, as the conclusion seemed obvious and simple: private ownership works, state ownership does not.

SOEs oftentimes lacked accountability and economic efficiency. This led to the Washington consensus, a view centered on the unquestioned belief in the superiority of private ownership over state ownership in economic policy making, which is often spearheaded by the US government and two Washington-based international organizations: the IMF and the World Bank. In 2008, however, the Great Recession necessitated many governments to bail out businesses, in essence creating many SOEs (however, due to the unmarketability of the term “SOE” they were now called “government-sponsored enterprises, or GSEs).

Such bail outs functioned to “rescue the economy” and “protect jobs” but this brings a moral hazard, the recklessness when people and organizations (including firms and governments) do not have to face the full consequences of their actions. Firms become “too big to fail” and can take irresponsible risks, because they know they will be bailed out.

Given the successes of the Chinese, Brazilian, and Norwegian economies, the debate has shifted toward a Beijing consensus, a view that questions the Washington Consensus’s belief in the superiority of private ownership over state ownership in economic policy making, which is often associated with the position held by the Chinese government (because SOEs make up 80% of China’s GDP).

How do informal institutions govern individual and firm behavior in different countries? - Chapter 3

This chapter focuses on informal institutions and examines how they influence individual and firm behavior. Proposition 2 of the institution-based view says that informal institutions become more important when formal institutions are vague/absent. This chapter will explore this as well.

How are informal institutions created?

Informal institutions come from socially transmitted information. Oftentimes people within a given society will view their specific set of informal institutions (i.e. culture, ethics, norms) as morally good. This is called ethnocentrism.

What is the informal institution of “culture”?

What is this paragraph’s learning objective? To be able to define culture and name its four main manifestations: language, religion, social structure, and education.

Dutch professor Geert Hofstede defines culture as “the collective programming of the mind which distinguishes the members of one group or category of people from another.” (Hofstede, 1997, Cultures and Organizations, 5). It is important to note that cultures and nation-states do not necessarily completely overlap (even though one can speak of “American culture,” for example). Furthermore, firms can also have specific organizational cultures. This book, however, uses “culture” when talking about national culture.

Even though the Chinese language has the most native speakers (20% of the world), in global business English is the lingua franca. A strong reason for this is that English-speaking countries have a large share of global output, so many products are marketed in English. Another reason is that globalization demands that people use one language for efficiency purposes. Thus, commanding the English language is an important business move (example: Shakira singing in English to reach a wider audience) and this gives native speakers an advantage. However, a disadvantage is that they are not forced to learn local languages when they work abroad, which can prevent them from picking up on small cultural details.

Besides languages, another important manifestation of culture is religion. 85% of the world adheres to some form of religion. For a firm, knowledge of local religion can be a real asset. For example, in Christian countries, there is a large increase in consumption during the month of December because of Christmas.

Social structure refers to the way a society broadly organizes its members. Two terms are relevant for this: social stratification, the hierarchical arrangement of individuals into social categories (strata) such as classes, castes, and divisions within a society; and social mobility, the degree to which members from a lower social category can rise to a higher status. In general, highly stratified societies have a low degree of social mobility. Social structure comes from a combination of formal and informal institutions. Take the urban/rural divide. In many western countries people in cities informally look down on those in the periphery, calling them “rednecks.” In China, however, this status is actually formalized by the official residence (hukou) system. Of course, such social structures are not always rigid: societies change.

The role that education plays in a culture depends, in part, on the social structure. In highly stratified cultures, education can preserve such stratification. Top universities can be difficult to access for low-income families, for example. In socially mobile societies, however, education has often played an important role in breaking down the barriers between social classes.

Keep in mind: there are other manifestations of culture than simply these four.

How do we understand cultural differences?

What is this paragraph’s learning objective? To be able to discuss how cultures systematically differ from each other.

There are three main ways to understand cultural differences: (1) context, (2) cluster, and (3) dimension approaches.

Context is the underlying background upon which social interaction takes place. There are low-context cultures, in which communication is usually taken at face value without much reliance on unspoken context; and high-context cultures, in which communication relies a lot on the underlying unspoken context, which is as important as the words used. Business people have to understand these differences in forms of communication in order to be effective. For example, in Japanese culture it can be impolite to say “no,” so an American person will have to figure out the lack of enthusiasm from context.

A cluster consists of countries that share similar cultures. Professors Ronan and Shenkar have proposed the following 10 clusters:

• Anglo
• Arab
• Eastern Europe
• Far East
• Germanic
• Latin America
• Latin Europe
• Near East
• Nordic
• Sub-Saharan Africa

Another set of 10 clusters, put forward by the Global Leadership and Organizational Behavior Effectiveness project led by professor House, goes as follows (5 are the same as Ronan and Shenkar’s):

• Anglo
• Middle East
• Eastern Europe
• Confucian Asia
• Germanic Europe
• Latin America
• Latin Europe
• Southern Asia
• Nordic Europe
• Sub-Saharan Africa

A final set of clusters was put forward by Samuel Huntington, based on civilization, meaning “the highest cultural grouping of people and the broadest level of cultural identity people have” (Huntington, 1996, The Clash of Civilizations and the Remaking of World Order, 43). Huntington puts forward 8 civilizations:

• Western
• Islamic
• Slavic-Orthodox
• Confucian (Sinic)
• Latin American
• Hindu
• African
• Japanese

The use of such clusters is somewhat controversial, especially since Huntington predicted a “clash” between these civilizations. Moreover, it is obvious that these clusters have a western bias, as there are several different categories for European cultures, but a major part of the African continent, which is much larger than Europe, is combined into just one category.

What is the dimension approach?

This approach is the most influential because (1) context is only one dimension and (2) the cluster approach offers little for differences within a cluster.

Hofstede et al. propose five dimensions (Hofstede, 1997, Cultures and Organizations: Software of the Mind, 25, 26, 53, 84, 113, 166):

• Power distance, the extent to which less powerful members within a country expect and accept that power is distributed unequally.
• Individualism, the idea that an individual’s identity is fundamentally his or her own. The opposite end of this is collectivism, the idea that an individual’s identity is fundamentally tied to the identity of his or her collective group. In individualistic societies, ties between individuals are relatively loose and individual achievement and freedom are highly valued.
• Masculinity, a relatively strong form of societal-level sex role differentiation whereby men tend to have occupations that reward assertiveness and women tend to work in caring professions. The opposite end of this is femininity, a relatively weak form of societal-level sex roe differentiation whereby more women occupy positions that reward assertiveness and more men work in caring professions.
• Uncertainty avoidance, the extent to which members in a culture accept or avoid ambiguous situations and uncertainty. Such cultures place a premium on job security and retirement benefits.
• Long-term orientation, dimension of how much emphasis is placed on perseverance and savings for future betterment.

Even though these dimensions are quite instructive, there are four large criticisms:

1. Cultural boundaries are not the same as national boundaries.
2. Hofstede has a western bias of his own, possibly leaving out important dimensions in non-western cultures.
3. Hofstede’s research focused on just one industry.
4. Hofstede’s data is now 40 years old.

Hofstede has retorted these criticisms by acknowledging the possible problems of 1), by adding the fifth dimension in response to 2), and by insisting that studies have since backed up his claims with regard to points 3) and 4).

Overall, culture plays an important role in global business. Even if sensitivity to cultural differences does not guarantee success, it can at least avoid blunders.

What is the role of ethics in global business?

What is this paragraph’s learning objective? To be able to understand the importance of ethics and was to combat corruption.

Ethics refers to the principles, standards, and norms of conduct that govern individual and firm behavior. Oftentimes firms will have a code of conduct, a set of guidelines for making ethical decisions. There are three ways to view such practices:

• A negative view that believes that firms do not inherently want to be ethical, but are forced to appear so by social pressure
• A positive view that believes that firms actually want to be morally good
• An instrumental view that believes that firms can make money by being morally good

Since different countries have different ethics, what choice does one make? There are two options. First, ethical relativism is a perspective that suggests that all ethical standards are relative. Therefore, if Muslim countries believe it is ethical to discriminate against women, why change that? The second perspective is that of ethical imperialism, which is a perspective that suggests that there is one set of Ethics (with a capital E) and we have it. Therefore, if Muslim countries believe it is ethical to discriminate against women, but you don’t, fight such practices.

Of course, neither of these extreme forms comes in to practice much. There are three “middle-of-the-road” guiding principle that have been offered by Thomas Donaldson (Donaldson, 1996, Values in tension: Ethics away from home, 4-11):

• Respect for human dignity and basic rights
• Respect for local traditions
• Respect for institutional context

Additionally, ethics can help in the fight against corruption, the abuse of public power for private benefits, usually in the form of bribery. Corruption is bad for global business, because it causes unfair competition. Investors will, therefore, be less likely to place money in corrupt markets, so FDI will go down.

What are some good responses in the face of ethical challenges?

What is this paragraph’s learning objective? To be able to identify norms associated with strategic responses when firms deal with ethical challenges.

The way in which firms respond to ethical challenges is often driven by certain norms. Four broad strategic responses are: (1) reactive, (2) defensive, (3) accommodative, and (4) proactive strategies.

A reactive strategy is passive. When problems arise, denial is usually the first line of defense.

A defensive strategy focuses on regulatory compliance. For example, a firm might not engage with social pressure from activist, but will become serious after politicians consider legislative steps.

In an accommodative strategy, firms have often internalized ethical values beyond the organizational norms (such as simply making money). For example, Ford responded differently in the 2000s to a design flaw than they did in the 1970s—they adapted to the criticisms they had gotten the last time.

A proactive strategy is all about seeing ahead and doing more than is required. For example, BMW was proactive in making possible the recycling of auto parts and, by doing so, set a new industry standard for other firms to follow.

What are important debates on informal institutions?

What is this paragraph’s learning objective? To be able to participate in three leading debates concerning cultures, ethics, and norms.

In the early 20^th century sociologist Max Weber proposed that the “protestant work ethic” led to strong economic development and capitalism, but this view has been challenged by an Islamic and an Asian (Confucian) perspective.

The Islamic perspective argues that it is western world dominance that leads to less economic development in the rest of the world. The East Asian perspective contends that it is precisely Confucianism, which was criticized by Weber, that has led to the current fast economic growth in countries such as Japan and China. Thus, the Islamic perspective criticizes the way in which countries attempt do dominate in economic terms, whereas the East Asian perspective claims that it has improved on such western tactics.

Since cultures are always evolving, in which direction do they change?

Some argue that there is a convergence in the world, that all countries all creating more “modern,” western values. A good argument is that many countries use western products, such as smartphones.

At the same time, however, many people in the Islamic world distance themselves from the West and many Asian foods and games are becoming increasingly popular on a global scale.

Thus, maybe instead of talking about “divergence” and “convergence,” we should speak of “crossvergence.”

“A common stereotype is that players from collectivist societies (such as China) are more collaborative and trustworthy, and that those from individualist societies (such as the US) are more competitive and opportunistic.” This is not the case, however, since people from collectivist societies are more focused on collaboration with the in-group, individuals and firms regarded as a part of ‘us,’ but they discriminate more harshly against the out-group, individuals and firms not regarded as a part of ‘us’.

Understanding the complex nature of such issues can help firm managers make better decisions.

How do firms leverage resources and capabilities? - Chapter 4

This chapter focuses on specific resources and capabilities that allow firms to be successful. It will thus go into the resource-based view of global business. One way of looking at firms is the SWOT analysis, which is a tool for determining a firm’s strengths (S), weaknesses (W), opportunities (O), and threats (T). Whereas the institution-based view focuses on external O and T, the resource-based view focuses primarily on internal S and W.

How do we understand resources and capabilities?

What is this paragraph’s learning objective? To be able to define resources and capabilities.

Resources and capabilities share the same definition, namely the tangible and intangible assets firms use to choose and implement its strategies, and the terms are used interchangeably throughout the book. As is clear from the definition, resources and capabilities are categorized into tangible resource and capability, assets that are observable and easily qualified, and intangible resource and capability, assets that are hard to observe and difficult (if not impossible) to quantify. There are four broad categories of tangible resources and capabilities: financial (for example, ability to raise external capital), physical (e.g. raw materials), technological (e.g. patents), and organizational (e.g. certain information system). With intangible resources and capabilities, there are three broad categories: human (for example, managerial talent), innovation (e.g. research and development capabilities), and reputational (e.g. perceptions of good quality).

How do firms create value from resources and capabilities?

What is this paragraph’s learning objective? To be able to explain how value is created from a firm’s resource and capabilities.

In the process of production, there is often a chain of activities that create value. This is the value chain, a stream of activities from upstream to downstream that add value. Each activity requires resources and capabilities, so it is important to identify which firms are superior at which activities. This is where we use benchmarking in SWOT analysis, the process of examining whether a firm has resources and capabilities to perform a particular activity in a manner superior to competitors.

Managers need to constantly question whether they need to keep activities in the value chain in-house, or rather outsource them. An important process in this is commoditization, a process of market competition through which unique products that command high prices and high margins gradually lose their ability to do so, thus becoming commodities. Also in this spectrum, on the other end of high commoditization, are proprietary activities, activities that remain quite unique and firm-specific. Another axis in deciding whether to keep activities in-house or to outsource them is industry specificity. If an activity is specific to a certain industry, a firm will want to keep that activity in-house. If an activity is common across industries, however, they will want to outsource the activity, because other firms can do it cheaper.

For example, in the past automakers used to produce the steel they needed for automobiles themselves, so they did it in-house. However, the same steel that is used in automobiles is also used in other industries, so it is quite common. At the same time, it has been highly commoditized, as it is no longer a unique product. That is why every automaker has outsourced steel production.

We define outsourcing as turning over an activity to an outside supplier that will perform the activity on behalf of the focal firm. It is important to note that outsourcing is not the same as the following terms:

• Offshoring, which is international/foreign outsourcing
• Onshoring, which is domestic outsourcing
• Captive sourcing, which is setting up subsidiaries abroad so that the work done is inhouse but the location is foreign. Also known as foreign direct investment (FDI).
• Domestic inhouse activity, which is self-explanatory.

In other words, there is an important geographical dimension to all in-housing and outsourcing.

What is the difference between SWOT and VRIO?

What is this paragraph’s learning objective? To be able to explain what a VRIO framework is.

The VRIO framework is the resource-based framework that focuses on the value (V), rarity (R), imitability (I), and organizational (L) aspects of resources and capabilities.

Only value-adding resources and capabilities can lead to competitive advantage and the relation between valuable resources and capabilities and firm performance is strong. Firms need to gain value-adding resources and get rid of non-value-adding resources, as the latter form a disadvantage.

In order for resources and capabilities to create a competitive edge for firms, they need to be rare in addition to valuable—otherwise it will lead to parity at best. “If everyone has it, you can’t make money from it.”

Even if a resource or capability is both valuable and rare, it might still only provide a temporary competitive edge, if it is relatively easy to imitate. Looking at the previously mentioned categories, tangible resources are generally easier to imitate than intangible resources.

Imitation of a firm’s success or effectiveness can be difficult to imitate because of causal ambiguity, the difficulty of identifying the actual cause of a firm’s successful performance.

Even valuable, rare, and hard-to-imitate resources and capabilities may not give a firm a sustained competitive advantage if it is not properly organized. Sometimes, the resources also have to work together well. These will then be called complementary assets, the combination of numerous resources and assets that enable a firm to gain a competitive advantage.

Another important concept is social complexity, which refers to the socially intricate and interdependent ways firms are typically organized. Large firms face a complex organizational question when they employ thousands of people in many different countries.

The VRIO framework analyzes resources in all these different categories to present a more accurate perspective.

What are two important debates concerning the resource-based view?

What is this paragraph’s learning objective? To be able to participate in two leading debates concerning leveraging resources and capabilities.

Some firms that are strong domestically are able to also succeed internationally, such as IKEA, but some also fail, like Wal-Mart. So, are domestic resources and cross-border capabilities essentially the same? This debate is part of a larger debate on the differences and similarities between IB and domestic business. However, there is no definitive answer to the question posed.

Many firms are now doing business process outsourcing (BPO), the outsourcing of business processes to third-party providers. This is controversial because it is unclear whether this is beneficial in the long run, or only short-term.

Those in favor of offshoring argue the large value it creates by recruiting high-quality labor for very low costs. Even though this means that people in western countries might lose their jobs, it still means mutual gains—just as with international trade.

Critics of offshoring argue three points on strategic, economic, and political grounds:

Strategically, when firms offshore many or most activities, what is to hold them back from leaving their home country? For western countries, that might lead to great losses in jobs. Moreover, many Asian firms are becoming more influential. They used to be original equipment manufacturers (OEMs), firms that execute design blueprints provided by Western firms and manufacture such products, but they are increasingly becoming original design manufacturers (ODMs), firms that both design and manufacture products. And many of such firms now want to become original brand manufacturers (OBMs), firms that design manufacture, and market branded products.

Economically, it is not certain that developed economies actually gain from such practices. Shareholders and CEOs might benefit, but the average person in a developed economy might not (because he/she might lose his/her job).

Politically, there is the added disadvantage that western firms are less bound by western values when they offshore (parts of) their business. Such firms are only interested in the cheapest and most exploitable labor, leading to the commoditization of humans.

More recently, some firms have responded to rising production costs in China, for example, by reshoring, moving formerly offshored activities back to the home country of the focal firm.

It is important to note that this debate barely takes place in emerging economies, because they benefit greatly from offshoring.

Why do we trade internationally? - Chapter 5

The main question is why do nations trade? This book provides answers via the resource-based and institution-based perspectives.

Why do nations trade?

What is this paragraph’s learning objective? To be able to use the resource-based and institution-based views to answer why nations trade.

Trade means export, selling abroad, and import, buying from abroad. There are two main sectors in trade: merchandise (goods), tangible products being traded, and services, intangible services being traded.

Nations trade because there is an economic advantage to be made. Both sides obviously have to benefit, otherwise one of the two sides will not trade.

Three terms are very important in (measuring) trade: trade deficit, an economic condition in which a nation imports more than it exports, trade surplus, an economic condition in which a nation exports more than it imports, and balance of trade, the aggregation of importing and exporting hat leads to the country-level trade surplus or deficit.

When we ask “why do nations trade?” we are actually asking “why do firms from different nations trade?”. However, the first question is shorter, so we use that phrase.

There are economic gains from international trade, according to the resource-based view, because some firms in one nation generate exports that are VRIO, which firms in other countries find beneficial to import. According to the institution-based view, different rules are set up to make sure that nation share or don’t share such gains.

What are the major theories of international trade?

What is this paragraph’s learning objective? To be able to understand classical and modern theories of international trade.

This book introduces six major theories on international trade:

1. Mercantilism
2. Absolute advantage
3. Comparative advantage
4. Product life cycle
5. Strategic trade
6. National competitive advantage

The first three are considered classical trade theories, advanced before the 20^th century, and the last three are considered modern trade theories, advanced during the 20^th century.

Proposed by Jean-Baptiste Colbert, the theory of mercantilism is the theory that suggests that the wealth of the world is fixed and that a nation that exports more and imports less will be richer. This led to the insight that self-sufficiency would be best and, therefore, mercantilism is very much linked to protectionism, the idea that governments should actively protect domestic industries from imports and vigorously promote exports.

Proposed by Adam Smith (Wealth of Nations, 1776), free trade, the idea that free market forces should determine how much to trade with little or no government intervention, would be much more beneficial to a nation’s wealth in the long run. Smith put forward the theory of absolute advantage, a theory that suggests that under free trade, a nation gains by specializing in economic activities in which it has an absolute advantage. An absolute advantage is the economic advantage one nation enjoys that is absolutely superior to other nations. Smith’s example held that Portugal should invest in producing wines and that England should invest in sheep and wool, and that the nations traded those produced goods, leading to lower production costs than if both Portugal and England produced wine and sheep/wool. So, international trade, according to Smith, is not a zero-sum game, as held by mercantilists.

Smith’s theory is interesting for nations that have an absolute advantage, but what if a nation doesn’t have that? David Ricardo (1817) posited a theory of comparative advantage, a theory that focuses on the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. In other words, if a country does not have an absolute advantage, it might still be beneficial for them to trade if they have a comparative advantage, a relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations. For example, if China can produce 80% of the wheat that the US produces, but only 50% of the aircrafts that the US produces, they have an absolute advantage in neither of those industries, but they do have a comparative advantage in producing wheat, so that is what they should produce.

One important concept in the creation of such net gains is opportunity cost, the cost of pursuing one activity at the expense of another activity, given the alternatives (other opportunities). For the US, opportunity costs of producing wheat are great, because they are only 25% more productive in wheat than China, whereas they are 100% more productive in aircraft.

This theory is much more realistic and useful when looking at trade in today’s world and it has led to a lower threshold for specialization.

Heckscher and Ohlin have argued that such absolute and comparative advantages are drawn from factor endowments, the extent to which different countries possess various factors of production such as labor, land, and technology. This led to their factor endowment theory (Heckscher-Ohlin theory), a theory that suggests that nations will develop comparative advantages based on their locally abundant factors.

One flaw in the factor endowment theory and comparative advantages is that it assumes a static situation, where no change happens. The classical theories have problems addressing this issue of change over time, so Raymond Vernon (1966, International investments and international trade in product life cycle, 190-207) came up with the product life cycle theory, a theory that accounts for changes in the patterns of trade over time by focusing on product life cycles. In this theory, there are three categories of countries: (1) the lead innovation nation, (2) other developed nations, and (3) developing nations. All products, according to Vernon, have three life cycle stages: new, maturing, and standardized.

Products in stage 1 will often be produced by the lead innovation nation (typically, the US) and is exported to other nations. In stage 2, demand grows and so does the ability to produce, which spreads to other developed nations. In the final stage, the product is standardized (or commoditized), so also the developing countries are able to produce the product.

There are two big criticisms: it assumes that the US will always be the lead innovation nation, which can also change in the future, and it assumes a stage-by-stage framework, whereas in reality firms launch new products simultaneously.

A major flaw in all of the previous theories, except mercantilism, is that they say nothing about the role of governments. In trade, government intervention is often seen as undesirable, but the strategic trade theory (Brander & Spencer, 1985, Export subsidies and international market share rivalry, 83-100; Krugman, 1986, Strategic Trade Policy and the New International Economics), a theory that suggests that strategic intervention by governments in certain industries can enhance their odds for international success, has addressed the question of whether governments can add value themselves.

Usually, the industries where such government intervention can be successful are high capital-intensity, high entry-barrier industries with substantial first-mover advantage, a benefit that accrues to firms that enter the market first and that late entrants do not enjoy, in which domestic firms may have little chance without government assistance. An example would be the aircraft industry, where Boeing has long dominated, but where European governments aided Airbus in getting a 50-50 share in the market. Governments can do this, for example, by giving subsidies to Airbus and this is called strategic trade policy, a government policy that provides companies a strategic advantage in international trade through subsidies and other supports.

This theory has two criticisms: first, are governments objective enough to carry out this task? And second, it will always be arbitrary which industries or firms will receive such support, and which will not.

The last and most recent theory is the theory of national competitive advantage of industries, a theory that suggests that the competitive advantage of certain industries in different nations depends on four aspects that form a “diamond”. It is therefore also called the diamond theory, proposed by Michael Porter (1990, Competitive Advantage of Nations).

This theory focuses on the question of why some industries in a nation are internationally competitive, but other industries within the same nation are not.

Porter found four aspects:

1. Country factor endowments
2. Domestic demand conditions
3. Domestic firm strategy
4. Related and supporting industries

The first aspect is logical: oil companies in Saudi Arabia succeed because the country has much oil. The second aspect states that tough domestic demand propels firms to new heights. For example, Hollywood is successful because Americans demand the best “sex and violence” movies, which are two themes that sell universally. The third aspect focuses on domestic firm strategy: if a firm faces tough competition domestically, it is forced to create optimal strategies that make them superior in international context. The final aspect takes into account the related industries: aerospace cannot become globally competitive if industries such as engines and avionics are weak.

Critics have argued that this theory places too much emphasis on domestic conditions.

Keep in mind four points: (1) some theories may seem common sense now, but they were revolutionary back then, (2) all theories simplify to make a point, (3) all theories assume resource mobility, the assumption that a resource used in producing a product for one industry can be shifted and put to use in another industry, and (4) classical theories assume no foreign exchange complications and zero transportation costs.

What are the political realities governing international trade?

What is this paragraph’s learning objective? To be able to realize the importance of political realities governing international trade.

There are two types of political barriers that hinder international trade: tariff barriers and nontariff barriers.

A tariff barrier is a means of discouraging imports by placing a tariff (tax) on imported goods. One example is the import tariff, a tax imposed on imported goods and services. Such tariffs are deadweight costs, net losses that occur in an economy as a result of tariffs.

So, if tariffs cause net losses, why are they imposed? Because of political realities. For example, Japanese farmers make up a disproportional vote in Japanese elections because of the way the districts have been drawn. So, when the farm lobby speaks, the government listens, and they impose a 777% tariff on imported rice (so Japanese people are forced to buy domestic rice, which leads to higher profit for the farm industry).

Tariffs, however, are often criticized in the world, so governments resort to nontariff barriers (NTBs), trade barriers that rely on nontariff means to discourage imports, in trade wars. NTBs include (1) subsidies, (2) import quotas, (3) export restraints, (4) local content requirements, (5) administrative policies, and (6) antidumping duties.

Subsidies are government payments to domestic firms.

Import quotas are restrictions on the quantity of imports. These are the most direct prevention of international trade.

Imposing such a protectionist measure as import quota is a highly political move, so oftentimes voluntary export restraints (VERs), international agreements that show that exporting countries voluntarily agree to restrict their exports, have been created. In essence, VERs are export quotas.

Local content requirements are requirements that stipulate that a certain proportion of the value of the goods made in one country must originate from that country. Many countries impose such a measure, for instance mandating that a domestically produced product will still be treated as an import subject to tariffs and NTBs unless a certain fraction of its value is produced locally, to deal with the fact that some products are officially produced in one country, but actually most of the production activities take place abroad.

Administrative policies are bureaucratic rules that make it harder to import foreign goods. For instance, a country can cite safety concerns in banning specific products from specific countries.

Antidumping duties refer to the tariff levied on imports that have been “dumped” (selling below costs to “unfairly” drive domestic firms out of business). See chapter 11 for more on this.

Usually, small groups benefit from such trade barriers, but the country as a whole suffers. So why do people argue against free trade?

What are economic arguments against free trade?

Two primary arguments: (1) the need to protect domestic industries and (2) the necessity to shield infant industries.

In some specific industries people can lose their jobs. In the earlier example, if the US leaves the wheat production to China to focus on aircraft production, people in the wheat industry might lose their jobs.

The infant industry argument says if domestic firms are as young as “infants,” in the absence of government intervention, they stand no chances of surviving and will be crushed by mature foreign rivals.

There are four primary arguments: (1) national security, (2) consumer protection, (3) foreign policy, and (4) environmental and social responsibility.

The national security argument is made in defense-related industries: you can’t always rely on the import of arms, because there is the possibility that another country stops exporting them to you.

Consumer protection can also lead to trade barriers. For example, the US required pig farmers to indicate where their pigs originated. However, pig farmers grew their Canadian pigs next to their American pigs, so it became hard to make the distinction. As a result, American pig farmers stopped importing Canadian pigs altogether.

Foreign policy objectives are often sought rough trade intervention. Trade embargos, for example, are politically motivated trade sanctions against foreign countries to signal displeasure. Oftentimes this is much more preferable than all-out war.

Finally, there is environmental and social responsibility. For example, a country can put up a barrier to trade with nations who let firms exploit the local population.

What are important debates concerning international trade?

What is this paragraph’s learning objective? To be able to participate in two leading debates concerning international trade.

The US has a large trade deficit. Should this be a concern?

Free traders argue that it is not because both the US and its trading partners benefit from the division of labor. They contend that trade is not about competition, but rather about mutually beneficial exchange.

Critics, however, argue that it is about competition, in markets, jobs, and incomes.

The US and India trade by tapping into each other’s comparative advantage. “India leverages its abundant, high-skill, and low-wage labor. American will channel their energy and resources to higher-skill, higher-paying jobs. While, regrettably, certain Americans will lose jobs, the nation as a whole benefits. “ However, Paul Samuelson has questioned this fundamental pillar of modern economics, the comparative advantage. He argued that since Indian innovation can catch up with US technology, making that the US are actually worse off overall.

Jagdish Bhagwati countered Samuelson, arguing: “Imagine that you are exporting aircraft, and new producers of aircraft emerge abroad. That will lower the price of your aircraft, and your gains from trade will diminish. You have to be naïve to believe that this can never happen. But you have to be even more naïve tot think that the policy response to the reduced gains from trade is to give up on the remaining gains as well. The critical policy question we must address is: When external developments, such as the growth of skills in China and India, for instance, do diminish the gains from trade to the US, is the harm to the US going to be reduced or increased if the US turns into Fortress America? The answer is: The US will only increase its anguish if it closes its markets.” (Bhagwati & Panagariya, 2004, Trading opinions about free trade, 20)

Why do firms engage in FDI? - Chapter 6

Both the institution-based view and the resource-based view offer ways of answering this question. FDI is defined as directly investing in activities that control and manage value creation in other countries. Firms that engage in this are called MNEs.

What is the FDI vocabulary?

What is this paragraph’s learning objective? To be able to use the resource-based and institutions-based views to answer why FDI takes place.

There are two most important ways of international investment: FDI and foreign portfolio investment (FPI), investment in a portfolio of foreign securities such as stocks and bonds. “Essentially, FPI is ‘foreign indirect investment’.”

The UN defines FDI as an equity stake of 10% or more in a foreign-based enterprise. Without a large enough stake, it is difficult to exercise management control rights the rights to appoint key managers and establish control mechanisms.

Horizontal FDI is a type of FDI in which a firm duplicates its home country-based activities at the same value chain stage (stages are vertical) in a host country. An automaker can have production activities in Germany and reproduce them in the US.

Vertical FDI is a type of FDI in which a firm moves upstream or downstream at different value chain stages in a host country. The automaker assembles cars in Germany (home country), but also manufactures components in the US (host country). That is an example of upstream vertical FDI, a type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country. An example of downstream FDI, a type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country, would be if the automaker does not distribute cars in Germany, but does invest in car dealerships in the US.

FDI flow is the amount of FDI moving in a given period (usually a year) in a certain direction. Here, FDI inflow is the inbound FDI moving into a country in a year and FDI outflow is the outbound FDI moving out of a country in a year.

FDI stock refers to the total accumulation of inbound FDI in a country or outbound FDI from a country across a given period (usually several years).

MNEs, which are sometimes also called multinational corporations (MNCs) or transnational corporations (TNCs), are defined as firms that engage in FDI. In other words, non-MNEs can engage in international business, for example by exporting their products, but that does not make them MNEs. What separates MNEs from non-MNEs is FDI. Keep in mind that MNEs are not a recent phenomenon: 2,000 years ago the Assyrians and Romans also engaged in FDI.

Why do firms become MNEs by engaging in FDI?

What is this paragraph’s learning objective? To be able to understand how FDI results in OLI advantages.

We can safely say that there are economic advantages to be gained from FDI. John Dunning has proposed that such gains come from ownership (O) advantages, location (L) advantages, and internalization (I) advantages; making OLI advantages (Dunning, 1993 Multinational Enterprises and the Global Economy, 207-219).

The ownership, an MNE’s possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI, help an MNE beat its rivals.

Location advantages are advantages enjoyed y firms operating in a certain location. For example, natural or labor resources.

Internalization is the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries. “In other words, external market transactions are replaced by internalization.” This can help to avoid the practice of licensing, Firm A’s agreement to give Firm B the rights to use A’s proprietary technology (such as a patent) or trademark (such as a corporate logo) for a royalty fee paid to A by B. This is typically done in manufacturing industries.

From an institution-based view, internalization is a response to market imperfections (market failure), the imperfect rules governing international transactions.

What are ownership advantages?

Ownership provide MNEs with management control rights. In overcoming the disadvantages of foreignness, FDI helps provide one of the best ways to facilitate the extension of firm-specific resources and capabilities abroad.

In entering a foreign market, a firm has three choices: doing so through (1) exporting, (2) licensing, or (3) FDI. With (1) there is the problem that exporting can be stopped by protectionist policies, so the question quickly becomes: should firms opt for (2) or (3)?

There are three reasons why firms prefer FDI over licensing.

1. FDI reduces dissemination risks. Dissemination risk is the risk associated with unauthorized diffusion of firm-specific know-how. In other words, firms in the host country can use your knowledge against you.
2. FDI provides tight control over foreign operations. It affords the owners with more power over the decisions made, even when the licensee is not out to take away company knowledge.
3. FDI facilitates the transfer of tacit knowledge through “learning by doing.” There are two forms of knowledge, “explicit” and “tacit.” Even though the explicit knowledge can be easily transferred to a licensee, the tacit knowledge of employees is more difficult to pass over. Some companies, such as Wal-Mart, actually excel exactly at these forms of tacit knowledge, so it is problematic for them to work with licensing.

What are location advantages?

We know that foreignness can be a liability, so engaging in foreign direct investments much have compelling advantages.

Sometimes such advantages are purely geographical. Austria’s capital Vienna is part of a western European culture, but it is actually more to the East than capitals of Eastern European countries, such as Prague and Ljubljana. Its western culture offers certain advantages for firms who want to be based in Central and Eastern Europe (CEE).

Other than natural geographical advantages, there is also the advantage of agglomeration, the clustering of economic activities in certain locations. Overall, agglomeration advantages come from:

• Knowledge spillovers, knowledge diffused from one firm to others among closely located firms.
• Industry demand that creates a skilled labor force.
• Industry demand that facilitates a pool of specialized suppliers and buyers.

Sometimes, it is a firms specific capabilities that combine well with a geographical location, such as when Toyota reopened a General Motors plant in California and made it work, where General Motors had failed.

Oftentimes, when a firm enters a country through FDI, its rivals will soon follow. This is especially true in industries characterized by oligopoly, industry dominated by a small number of players.

What are internalization advantages?

Whereas we previously used the resource-based view, this question is better answered by the institutions-based view.

Most rules and regulations are enforced by nation-states, so when firms engage in international business, these rules and regulations can fail. Since they are made to reduce uncertainty, failure can lead to more uncertainty, which causes higher transaction costs. If such costs are too high, firms will not want to participate in such a market, causing it to fail (market failure).

Firms use internalization to combat such market failure. An MNE reduces cross-border transaction costs and increases efficiencies by replacing an external market relationship with a single organization spanning both countries—transforming the external market with in-house links. International trade between two independent firms has bow been transformed into intrafirm trade, international transactions between two subsidiaries in two countries controlled by the same MNE.

What are the realities of FDI?

What is this paragraph’s learning objective? To be able to identify different political views on FDI based on an understanding of its benefits and costs to host and home countries.

The radical view is hostile to FDI. It treats FDI as an instrument of imperialism and a vehicle for exploitation of domestic resources by foreign capitalists and firms. This view is in decline because many nations that held this view stayed poor, whereas other nations, those who embraced FDI, gained significant economic growth.

The free market view is a political view that suggests that FDI unrestricted by government intervention is the best.

Most countries, however, have pragmatic nationalism, a political view that only approves FDI when its benefits outweigh its costs.

Overall, more and more countries are seeing FDI as favorable.

Apparently, more countries are seeing the benefits, but they still outweigh their options. In general, there are four benefits of FDI to host countries:

1. Capital inflow
2. Better technology because of technology spillovers, technology diffused from foreign firms to domestic firms. This is know as the demonstration effect, or the contagion (imitation) effect, the reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation.
3. The gaining of advanced management know-how
4. Job creation, both directly (MNEs employing local population) and indirectly (people spending more money).

The primary costs are as follows:

1. Loss of sovereignty: the owners of the MNE now make important economic decisions, such as those about investing and producing.
2. Adverse effects on competition: the big MNEs drive local enterprises out of business.
3. Capital outflow: the profits that the MNEs make is repatriated (sent back) to the headquarters in home countries.

These are generally polar opposite to the host countries’ costs and benefits.

Benefits:

• Repatriated earnings from profits from FDI
• Increased exports of components and services to host countries
• Learning via FDI from operations abroad

Costs:

• Capital outflow
• Job loss

Especially the problem of job loss is prominent in home countries.

How do MNEs and host governments bargain?

MNEs and host governments bargain on whether or not FDI will take place. Both sides have relative bargaining power, the ability to extract favorable outcome from negotiations due to one party’s strengths. The power of the government is that they can set the rules, but the power of MNEs is that they can take their business (FDI) elsewhere. In effect, different countries are competing with one another for precious FDI dollars.

Negotiations are characterized by three C’s: common interest, conflicting interest, and compromise.

Once there is an FDI entry, the deal can be renegotiated. This is the obsolescing bargain, the deal struck by MNEs and host governments, which change their requirements after the initial FDI entry.

Governments have extra power this way, because they can threaten to expropriate, government’s confiscation of foreign assets. MNEs in such situations are concerned about their sunk costs, the costs that a firm has to endure even when its investments turns out to be unsatisfactory.

What are some important debates on FDI?

What is this paragraph’s learning objective? To be able to participate in two leading debates concerning FDI.

We need to keep in mind that FDI is not the only form of foreign market entry. Firms can also opt to outsource (or in foreign markets, offshore) their production activities, instead of keeping to do it themselves via FDI.

Three questions can help in evaluating which is the better option: (1) how critical is the activity being considered to the core mission of the firm, (2) how common is the activity being undertaken, and (3) how readily available is the overseas talent to perform this activity?

One important question for whether to accept FDI is: can we trust foreign firms in making decisions important to our economy?

In the 1960s, Europe was concerned about the many US FDIs, in the 1980s, the US was concerned about many Japanese FDIs, and currently there are such concerns about Chinese FDIs.

In emerging economies, on the other hand, most countries are favorable toward FDI, but expropriation still occurs every now and then.

How do firms deal with foreign exchange rates? - Chapter 7

Important questions in this chapter: why is the value of currencies so important to the global automobile industry? What determines foreign exchange rates? How do foreign exchange rates affect trade and investment undertaken by firms such as Toyota as well as Chrysler, Fiat, Ford, GM, and Honda? How can firms respond strategically?

The institutions-based view suggests that domestic and international institutions influence foreign exchange rates and affect capital movements. In turn, the resource-based view sheds light on how firms can profit from favorable foreign exchange movements or avoid being crushed by unfavorable movements by developing their own firm-specific resources and capabilities.

What determines foreign exchange rates?

What is this paragraph’s learning objective? To be able to understand the determinants of foreign exchange rates.

A foreign exchange rate is the price of one currency, such as the dollar, in terms of another, such as the euro. An appreciation is the increase in the value of the currency, depreciation is a loss in value of the currency.

We know that supply and demand affect prices of products. It works the same with foreign exchange rates: when there is a high demand for the dollar, for example when many American products are being bought, the value of the dollar goes up. When there is high supply for the dollar, for example when the US government prints money, the value of the dollar goes down.

However, because money is such a unique commodity, there are five other factors that influence foreign exchange rates: (1) relative price differences, (2) interest rates and monetary supply, (3) productivity and balance of payments, (4) exchange rate policies, and (5) investor psychology.

Why is it that some countries have high prices (Switzerland, for example) and others have low prices (the Philippines, for example)? The purchasing power parity theory (PPP theory) suggests that in the absence of trade barriers, the price for identical products sold I different countries must be the same. Thus, in the long run, prices will become more similar (Taylor and Taylor, 2004, The purchasing power parity debate, 135-158).

We can look at the so-called “Big Mac index” to see why prices are different. You can order a Big Mac at McDonalds almost anywhere in the world, and prices should be similar, but the index show that they are not. This is because even though traded inputs are about as expensive (flour for the bun), the non-traded input (such as labor) is much cheaper in emerging economies, so prices there are lower. But one shouldn’t read too much into this index; it’s mostly just funny.

The PPP theory suggests a direction for the long run, but what about the short run? Here, interest rates are very influential. A high interest rate for a currency will lead to increased demand, and thus a higher value, for a currency in the short term.

The rate of inflation is also important. Some governments print money in cases of budgetary shortfalls, but this raises the inflation rate and lowers the value of the country’s currency.

In international trade, when a country’s productivity goes up, its competitive position will improve. This way, its balance of trade will change (most likely, there will be a trade surplus). Such changes influence the balance of payments (BOP), a country’s international transaction statement, which includes merchandise trade, service trade, and capital movement.

Countries with a surplus will see their currency appreciate, while countries with a deficit will see their currency depreciate (though these processes take years). The US has a large deficit in their BOP, so the dollar is currently depreciating. Ceteris paribus, this lower-valued dollar will lead to more purchases of American products, leading to a smaller trade deficit.

There are two most important exchange rate policies: a floating (flexible) exchange rate policy, a government policy to let supply-and-demand conditions determine exchange rates, and a fixed exchange rate policy, a government policy to set the exchange rate of a currency relative to other currencies.

A floating rate is more for free market believers, but almost no countries adopt a clean (free) float, meaning a pure market solution to determine exchange rates. Most have a dirty (managed) float, meaning they use selective government intervention to determine exchange rates. The main objective for intervention is to prevent the emergence of erratic fluctuations. One option for intervening is adhering to target exchange rates (crawling bands), specified upper or lower bounds within which an exchange rate is allowed to fluctuate.

Many emerging economies peg, a stabilizing policy of linking a developing country’s currency to a key currency, such as the US dollar. Such a policy can halt domestic inflation, for example.

Investor psychology is highly significant in the short term. One important concept in the psychology of the investor is the bandwagon effect, the effect of investors moving I the same direction at the same time, like a herd. Along the same lines, capital flight is a phenomenon in which a large number of individuals and companies exchange domestic currency for a foreign currency. Many times, investor psychology is not very rational.

What does the evolution of the international monetary system look like?

What is this paragraph’s learning objective? To be able to track the evolution of the international monetary system.

There have been three major monetary systems in the world: (1) the gold standard, (2) the Bretton Woods system, and (3) the post-Bretton Woods system.

The Gold standard was a system in which the value of most major currencies was maintained by fixing their prices in terms of gold. Gold was the common denominator in this system, the currency or commodity to which the value of all currencies were pegged. This system was in place from 1870 to 1914.

The gold standard was abandoned when WWI broke out and during the interbellum many countries were competitively devaluating in an effort to boost exports. However, it was a “race to the bottom”.

Near the end of WWII, an alliance of 44 countries agreed on a new system: the Bretton Woods system, a system in which all currencies were pegged at a fixed rate to the US dollar, named after the place where the agreement was made: Bretton Woods, New Hampshire, USA. Such a system made sense at a time when the US economy contributed 70% of global GDP and had huge exports at the end of WWII.

By 1970, exports in Europe (especially West-Germany) had caught up and the US dollar was inflating because of Lyndon Johnson’s policy of printing money. It became more convenient for the West-German government cut its currency, the mark, loose from the dollar, which they did in 1971. Major countries followed West-Germany in 1973. In hindsight, the Bretton Woods system had been built on two conditions: (1) the US inflation rate had to be low and (2) the US could not run a trade deficit. When both these conditions were violated, the demise of the system was inevitable.

Thus, we now live in the post-Bretton Woods system, a system of flexible exchange rate regimes with no official common denominator. Its strength is flexibility, its weakness uncertainty.

The IMF, an international organization that was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements, was founded in 1944 as part of the Bretton Woods system. The IMF lends money, which they receive from countries’ different quota, the weight a member country carries within the IMF, which determines the amount of its financial contribution (technically know as its “subscription”), its capacity to borrow from the IMF, and its voting power. When countries loan from the IMF, they are required to adhere to certain conditions that the IMF induces.

What are strategic responses to foreign exchange movements?

What is this paragraph’s learning objective? To be able to identify firms’ strategic responses to deal with foreign exchange movements.

There are different strategies for financial and non-financial companies.

The foreign exchange market is the market where individuals, firms, governments, and banks buy and sell foreign currencies. Financial companies can profit from this market, because it is really big ($5.3 trillion per day). There are three primary types of foreign exchange transactions: (1) spot transactions, (2) forward transactions, and (3) swaps.

Spot transactions are the classic single-shot exchange of one currency for another.
Forward transactions are foreign exchange transactions in which participants buy and sell currencies now for future delivery. The most important advantage of this is to protect traders and investors from being exposed to fluctuations of the spot rate, an act know as currency hedging. If the forward rate of the euro per dollar is higher than the spot rate, the euro has a forward discount. If it is lower, it has a forward premium. A risk here is that firms cannot see into the future, and cannot always know the future spot rate.
Currency swaps are foreign exchange transactions between two firms in which currencies are converted into another at Time 1, with an agreement to revert it to the original currency at a specified Time 2 in the future.

It is mostly large, international banks that participate in the foreign exchange market. They make money by capturing the difference between their offer rate, the price to sell a currency, and their bid rate, the price to buy a currency. This difference is called the spread.

Non-financial companies have to deal with currency risks, the potential for losses associated with fluctuations in the foreign exchange market. There are three major strategies: (1) invoicing in their own currencies, (2) currency hedging, and (3) strategic hedging.

The easiest way of avoiding currency risks is by invoicing (NL: “factureren”) in one’s own currency.

Currency hedging can be risky in itself, as companies can bet wrong.

Strategic hedging is spreading out activities in a number of countries in different currency zones to offset any currency losses in one region through gains in other regions. This strategy is also known as currency diversification.

What are some important debates on foreign exchange?

What is this paragraph’s learning objective? To be able to participate in three leading debates concerning foreign exchange movements.

We look at (1) fixed versus floating exchange rates, (2) a strong dollar versus a weak dollar, and (3) hedging versus not hedging.

One argument for fixed exchange rates is that governments are kept disciplined, and prevented from simply printing money to fix their economies. There also a reduce in uncertainty, so it encourages trade and FDI.

However, floating exchange rates may avoid large BOP deficits and crises. Moreover, countries are freer to make their own monetary policies, instead of being dependent on, for example, the US (as in the Bretton Woods system).

Floating exchange rates are more volatile, which is why some countries use a currency board, a monetary authority that issues notes and coins convertible into a key foreign currency at a fixed exchange rate.

The advantages of a strong (appreciating) dollar are:

• US consumers benefit from low prices on imports
• Lower prices on foreign goods help keep US price level and inflation level low.
• Us tourists enjoy lower prices abroad
• US firms find it easier to acquire foreign targets

Disadvantages are:

• US exporters have a hard time to compete on price abroad
• US firms in importcompeting industries have a hard time competing with low-cost imports
• Foreign tourists find it more expensive when visiting the US.

The advantages of a weak (depreciating) dollar are:

• US exporters find it easier to compete on price abroad
• US firms face less competitive pressure to keep prices low
• Foreign tourists enjoy lower prices in the US
• Foreign firms find it easier to acquire US targets
• The US can print more dollars (quantitative easing) to export its problems to the rest of the world

Disadvantages are:

• US consumers face higher prices on imports
• Higher prices on imports contribute to higher price level and inflation level in the US
• US tourists find it more expensive when traveling abroad
• Governments, firms, and individuals outside the US holding dollardenominated assets suffer from value loss of their assets.

Many companies want to hedge, because by not doing so, your company is dependent on the sport market.

However, many firms don’t engage in hedging. The main argument for hedging is that it works as an insurance, but many companies simply aren’t interested in such insurances, because it can eat into profits.

In essence: the answer is unclear.

How can firms capitalize on global and regional integration? - Chapter 8

The North American Free Trade Agreement (NAFTA) is a free trade agreement among Canada, Mexico, and the United States. Such trade agreements are made because of economic integration. Regional economic integration refers to efforts to reduce trade and investment barriers within one region, such as NAFTA. Global economic integration, in turn, refers to efforts to reduce trade and investment barriers around the globe.

What are the benefits of global economic integration?

What is this paragraph’s learning objective? To be able to make the case for global economic integration.

After mercantilism worsened the Great Depression and led to WWII, in 1948 the General Agreement on Tariffs and Trade (GATT), a multilateral agreement governing the international trade of goods (merchandise), was created. Out of this agreement eventually came the World Trade Organization (WTO), the official title of the multilateral trading system and the organization underpinning this system since 1995. Specifically in Europe, regional economic integration started in 1951 and culminated in the European Union (EU), the official title of European economic integration since 1993.

Theoretically, there are economic gains to be made from free trade, but many countries did not realize this until the end of WWII. After that, much of the global economic integration was aimed at the promotion of peace—the thought being that trading partners do not wage wars.

• Promote peace by promoting trade and investment
• Build confidence in a multilateral trading system

The WTO has effective dispute resolution mechanisms which allow countries to handle disputes constructively, instead of having to wage (trade) war on another. Furthermore, the WTO system is a multilateral trading system, meaning that all participating countries have a say, which helps the principle of non-discrimination, a principle that a country cannot discriminate among its trading partners. Lastly, it is estimated that cutting all global trade barriers would raise the worldwide income by around 600 billion dollars, which could greatly help individuals too, as it would create more and better jobs.

Critics, however, will argue that global economic integration has a terrible impact on the environment and that the fruits of the economic gains are distributed unfairly.

• Disputes are handled constructively
• Rules make life easier and discrimination impossible for all participating countries
• Free trade and investment raise incomes and stimulate economic growth

How do we organize world trade?

What is this paragraph’s learning objective? To be able to understand the evolution of the GATT and the WTO, including current challenges.

The GATT was an agreement; not an organization. Following its creation, the average tariff in developed countries dropped from 40% in 1948 to 5% in 2005. Exports grew about 100 times, while world GDP grew five times.

In the 1980s it became clear that reforms were necessary for three reasons: (1) intellectual property (IP) was not covered, (2) there were many loopholes in merchandise trade, and (3) more and more governments were invoking nontariff barriers (NTBs), which were more difficult to combat. So, in 1994, after the Uruguay Round, participating countries agreed to create the WTO.

In the transition from the GATT to the WTO, the GATT did not “die.” It is useful to distinguish between GATT 1947 and GATT 1994.

The WTO has six main areas:

• An umbrella agreement, simply called the Agreement Establishing the WTO.
• An agreement governing the international trade of goods, still using the old title as the GATT—technically, it is “GATT 1994.”
• An agreement governing the international trade of services, the General Agreement on Trade in Services (GATS)
• An agreement governing IP rights, the TradeRelated Aspects of Intellectual Property Rights (TRIPS)
• Trade dispute settlement mechanism, which allow the WTO to adjudicate trade disputes among countries in a more effective and less timeconsuming way.
• Trade policy reviews, which enable other members to “peer review” a country’s trade policy.

The problem with GATT 1947 was that it experienced (1) long delays, (2) blocking by accused countries, and (3) inadequate enforcement. The WTO addresses all three of these problems. First, it sets a time limit for the peer review panel. Second, it removes the power of the accused countries to block any unfavorable decision. Third, even though the WTO has no real enforcement capabilities, but the WTO can “recommend” certain outcomes, and these are adhered to most of the time, because compliance is oftentimes preferable to undermining the entire system.

The Doha Round was a round of WTO negotiations to reduce agricultural subsidies, slash tariffs, and strengthen intellectual property protection that started in Doha, Qatar, in 2011. Officially known as the “Doha Development Agenda,” it was suspended in 2006 due to disagreements. This round was important because it was launched after the 9/11 attacks and because it aimed to promote economic development in emerging economies.

Many emerging economies demanded that Japan, the EU, and the US reduce their farm subsidies, both all three parties refused to do so, or even increased farm subsidies. In 2006, participating countries concluded that agreements were not going to be made. Attempts were made to make an agreement in 2008 and in 2011, but in 2014 negotiations crashed again on food subsidies.

What are the benefits of regional economic integration?

What is this paragraph’s learning objective? To be able to make the case for regional economic integration.

They are similar to those for global economic integration. Politically, regional economic integration promotes peace.

Economically, the advantages are again (1) disputes are handled constructively, (2) consistent rules make life easier and discrimination impossible, and (3) free trade and investment raise incomes and stimulate economic growth.

However, there is also a case against regional economic integration. Politically, it is different from global economic integration, because firms outside the region can be discriminated against. Economically, regional economic integration can lead to loss of sovereignty (as is the case with the EU, for example).

• A free trade area (FTA) is a group of countries that remove trade barriers among themselves. A recent example is the Eurasian Union, consisting of Belarus, Kazakhstan, and Russia, created in 2014.
• A customs union is one step beyond an FTA, as it imposes common external policies on nonparticipating countries.
• A common market combines everything a customs union has, plus the permission of free movement of goods and people.
• An economic union has all the features o fa common market, but members also coordinate and harmonize economic policies (in areas such as monetary, fiscal, and taxation) to blend their economies into a single economic entity. One possible dimension of an economic union is to establish a monetary union, which is a group of countries that use a common currency (e.g. the EU).
• A political union is the integration of political and economic affairs of a region. An example of this is the United States.

What does regional economic integration in Europe look like?

What is this paragraph’s learning objective? To be able to understand regional economic integration efforts in Europe, the Americas, the Asia Pacific, and Africa.

In 1951, Belgium, France, Germany (West Germany), Italy, Luxembourg, and the Netherlands signed the European Coal and Steel Community (ECSC) Treaty, which was aimed primarily at keeping Germany and France from fighting with each other, as they had done on three occasions in the 80 years before. The Benelux is geographically located in between, so they wanted to make sure of this as well, and Italy had also been drawn into the wars before, so they wanted to prevent this too. Steel and coal, specifically, were industries of war, so the idea was to prevent war by making the countries codependent. In 1957, the European Economic Community (EEC) followed, which was later known as the European Community (EC). In 1991, 12 member countries signed the “Maastricht Treaty” to create the European Union.

The EU has 28 member countries and is situated in Brussels, Belgium. It is an economic union, with most trade barriers removed. The borders have become the Schengen, a passport-free travel zone. There is a single currency, the euro, a currency used in 18 EU countries. These countries are called the euro zone.

The adoption of the euro has been mostly successful. These are the costs and benefits:

Benefits:

• Reduce currency conversions costs.
• Facilitate direct price comparison.
• Impose monetary discipline on governments.

Overall, the euro has boosted intra-EU trade by about 10%.

Costs:

• Unable to implement independent monetary policy.
• Limit the flexibility in fiscal policy (in areas such as deficit spending).

Risks are spread in the euro zone, but this comes at the risk of some countries becoming “free riders,” because they don’t have to fix their own fiscal problems.

Even though the EU has led to peace on the continent and to economic growth, there are also challenges. First, internal divisions, and, second, enlargement concerns.

The internal divisions have always been present between France (let the union become political) and Britain (let the union stay economic). The crisis following the Great Recession and the bailouts to rescue Greece, Ireland, and Portugal have intensified this debate. Germany pays for other countries’ problems, but it is also not realistic for them to abandon the euro. Of course, Britain has now chosen to leave the EU (the book only seems to know that Prime Minister David Cameron called for a referendum, but it doesn’t seem to know the result).

There are also debates about the enlargement of the EU. Those against stress that economically strong countries constantly take on additional economic burdens by letting smaller countries join. The addition of Turkey is a debate on its own, because of its large Muslim population, as opposed to the primarily Christian EU, and because it would have the second-largest population—giving Turkey the second-largest voting power.

These problems have been magnified since 2008, with the Great Recession and the following European crisis. Negativity can be seen as a smaller version of the backlash against globalization itself.

What does regional economic integration in the Americas look like?

NAFTA was launched in 1994 and it was not uncontroversial. Opponents emphasized the chance of job loss in the US. However, in 20 years trade grew four times, and Mexico’s GDP per capita rose very much. Job destruction never really took place—only in some sectors. Moreover, NAFTA has allowed the US to preserve jobs too.

However, not everyone is positive. Firms have been shifting from Mexico to China lately.

There are two customs unions in South America: the Andean Community, a customs union in South America that was launched in 1969, and the Mercosur, a customs union in South America that was launched in 1991. Both unions have not been so effective, because trade with their partners is low, whereas trade with the US is high, but the US are not in the union. In 2008, the unions agreed together to form the Union of South American Nations (USAN, or in Spanish, UNASUR). One of its accomplishments is the United States-Dominican Republic-Central America Free Trade Agreement (CAFTA), in 2005.

What does regional economic integration look like in the Asia Pacific?

The Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA or CER), launched in 1983, turned rivalry between the two countries into partnership. It is regarded a successful FTA.

In 1967 the Association of Southeast Asian Nations (ASEAN) was founded. The benefits of the FTA here are limited because its main trading partners (US, EU) are not members.

Australia wanted part of the ASEAN, so it suggested to launch the Asia-Pacific Economic Cooperation (APEC), the official title for regional economic integration involving 21 member economies around the pacific. After Japan joined, the US wanted in as well, as it did not want to lose influence to Japan, and they brought in Canada and Mexico too. APEC contributes 46% of world trade and 54% of world GDP. In fact, APEC might be too big, so the smaller Trans-Pacific Partnership (TPP) is being developed, a multilateral free trade agreement being negotiated by 12 Asia Pacific countries.

What does regional economic integration in Africa look like?

Many attempts have been made at this, but many have failed. There is little trade within Africa (only 10% of the continent’s trade) and bad attempts have led to frustration, leading to more bad attempts at real economic integration.

What are important debates and extensions on global and regional integration?

What is this paragraph’s learning objective? To be able to participate in two leading debates concerning global and regional economic integration.

Some argue that regional economic integration will eventually lead to better global economic integration. Others, however, argue the opposite: that it will halt global economic integration, because it emphasizes “us versus them.”

If you look at China, the answer would be “yes.” Since they joined the WTO in 2001, they have been able to become a trading superpower. However, Andrew Rose has found that trade has risen for both WTO member countries and other countries, so it is unclear if WTO caused more trade.

How do entrepreneurial firms do business? - Chapter 9

Small and medium-sized enterprises (SMEs) are firms with fewer than 500 employees in the United States, or with fewer than 250 employees in the European Union.

What is entrepreneurship?

What is this paragraph’s learning objective? To be able to define entrepreneurship, entrepreneurs, and entrepreneurial firms.

Firm size and age are not defining characteristics of entrepreneurship. It is defined as the identification and exploitation of previously unexplored opportunities. Entrepreneurs are the founders and/or owners of a new business or managers of existing firms, who identify and exploit new opportunities. International entrepreneurship is a combination of innovative, proactive, and risk-seeking behavior that crosses national borders and is intended to create wealth in organizations.

SMEs are important, because they make up more than 95% of all firms in the world. Entrepreneurship is often associated with SMEs (though it does not define it).

Which institutions and resources affect entrepreneurship?

What is this paragraph’s learning objective? To be able to identify the institutions and resources that affect entrepreneurship.

Formal and informal institutions can affect entrepreneurship. If a country has an entrepreneur-hostile institutional framework, it might drive away certain entrepreneurs to other countries. In some countries, starting a firm can be much easier than in others. Generally speaking, developed countries have less rules and procedures for starting a company than developing countries, making it easier to do so. Many countries are, thus, trying to make life easier for entrepreneurs.

Informal institutions also play a role. For example, individualistic societies tend to have relatively many entrepreneurs compared to collectivistic societies.

The VRIO analysis comes in here again: an entrepreneur’s resources must create value, they must be rare, they must be hard to imitate, and finally, they must be organizationally embedded. Logically, firm-specific resources and capabilities largely determine entrepreneurial success and failure.

How do entrepreneurial firms grow?

What is this paragraph’s learning objective? To be able to discuss three characteristics of a growing entrepreneurial firm.

The four major characteristics of a growing entrepreneurial firm are: (1) growth, (2) innovation, (3) financing, and (4) internationalization. This paragraph will involve 1-3.

Entrepreneurial firms should leverage their (intangible) vision, drive and leadership capabilities, as it may be short on (tangible) resources such as financial capital. Being dynamic and flexible is key in this. Sometimes smaller firms have to “go for the crumbs.”

Innovation is at the heart of wat entrepreneurial firms do. Innovation can be low-tech (new, delicious hot sauce) or high-tech (a new network that can handle millions of online daily transactions).

An innovation strategy has three advantages:

• It allows a potentially more sustainable basis for competitive advantage, as it might earn “monopoly profits” until competitors emerge.
• Innovation viewed broadly means recombining existing organizational routines to create a novel product.
• Entrepreneurial firms are often uniquely fitted for innovation. Many SMEs are founded by people who left larger firms to do things themselves.

Start-ups need money, but investing in them is a risk since a majority of start-ups fail. Actors who make such investments can be wealthy individuals; venture capitalists (VCs), investors who provide risk capital for early stage ventures; banks; foreign entrants; and government agencies.

There are worldwide differences in acquiring finances. In western countries there is a relatively large percentage of VCs, whereas in many developing countries an often used strategy is microfinance, a practice to provide micro loans (50-300 dollars) used to start small businesses with the intention of ultimately lifting the entrepreneurs out of poverty.

How do entrepreneurial firms internationalize?

What is this paragraph’s learning objective? To be able to discuss how international strategies for entering foreign markets are different from those for staying in domestic markets.

It is a myth that only MNEs function internationally, and that SMEs only function domestically. Start-ups that attempt to do business abroad from their inception are often called born global firms (or international new ventures).

Generally speaking, international transaction costs are higher. This is due to the differences in formal and informal institutions, but also due to the greater possibility of opportunism. Some strategies to overcome such issues are as follows:

SMEs can enter foreign markets in three broad ways: (1) direct exports, (2) licensing/franchising, and (3) FDI.

• Direct exports are the sales of products made by firms in their home country to customers in other countries. A transaction cost here can be that one has to trust the transporter. An idea to overcome this is the letter of credit (L/C), a financial contract that states that the importer’s bank will pay a specific sum of money to the exporter upon delivery of the merchandise.
• Franchising is Firm A’s agreement to give Firm B the rights to use A’s proprietary assets for a royalty fee paid to A by B. This is typically done in service industries.
• FDI may involve greenfield wholly owned subsidiaries, strategic alliances with foreign firms, and/or acquisitions of foreign firms. The advantage above licensing is that a firm can better control how its proprietary technology is used.

The five main strategies are (1) export indirectly, (2) become suppliers for foreign firms, (3) become licensees or franchisees of foreign brands, (4) become alliance partners of foreign direct investors, or (5) harvest and exit through sell-offs.

• Many SMEs do not have the resources to handle direct exports, so they use indirect exports, a way to reach overseas customers by exporting through domesticbased export intermediaries. An export intermediary is a firm that performs an important middleman function by linking domestic sellers and foreign buyers that otherwise would not have been connected. These are often entrepreneurs themselves.
• An entrepreneurial firm can become a supplier for a foreign firm that enters the domestic market.
• An entrepreneurial firm can consider becoming a licensee or franchisee of a foreign brand.
• It can be difficult to fight off aggressive MNEs, so, instead, an entrepreneurial firm can join them by becoming an alliance partner in an FDI.
• An entrepreneurial firm can also try to come up with an innovative idea and then be acquired by a larger foreign entrant.

What are some important debates and extensions on entrepreneurial firms?

What is this paragraph’s learning objective? To be able to participate in two debates concerning entrepreneurship.

What motivates entrepreneurs? Some argue that “traits” matter, meaning that some people have certain desires for achievement and more willingness to take risk. An example of such a person is a serial entrepreneur, an entrepreneur who starts, grows, and sells several business throughout his/her career. Others, however, argue that such traits are not necessarily limited to entrepreneurs. Moreover, entrepreneurs are not a homogenous group, so a psychological profile will come out very divers (and not useful).

Therefore, one can place an emphasis on the institutions that affect entrepreneurship. Certain societies seem to motivate more entrepreneurship than other societies. This debate is sort of an extension on the nature versus nurture debate.

There are two important questions here: 1) Can SMEs internationalize faster than what has been suggested by traditional stage models (models that portray SME internationalization as a slow, stage-by-stage process)? And 2) should they rapidly internationalize?

The answer to 1) is most likely yes, some can, but not all.

The answer to the second question is what is actually debated. Some argue that every industry has to become global, whereas others argue that this take time in most cases. IKEA, for example, waited twenty years.

An advantage of rapid internationalization is that a firm can beat out rivals that wait with going abroad. However, others suggest that “you must first be successful at home, then move outward in a manner that anticipates and genuinely accommodates local differences.”

How do firms enter foreign markets? - Chapter 10

How do firms overcome the liability of foreignness?

What is this paragraph’s learning objective? To be able to understand how institutions and resource affect the liability of foreignness.

The liability of foreignness is the disadvantage that foreign firms necessarily experience in a host country, simply because they are foreign. There are two aspects of this:

1. There is the fact that certain formal and informal institutions govern the rules of the game in different countries, which can be in favor of domestic firms.
2. Foreign firms are often discriminated against by customers.

So how do firms overcome such issues? From the institution-based view, firms have to adapt to the new rules of the game—for example, a different political/economic/legal system. Much the same is true for informal institutions: foreign firms need to have knowledge of these and need to take them into account. From the resource-based view, foreign firms need to use their superior resources and capabilities to overwhelm the market. We can use a VRIO analysis to see if this is the case.

Where to enter?

What is this paragraph’s learning objective? To be able to match the quest for location-specific advantages with strategic goals (where to enter).

A spatial perspective is inherent to IB (since it is doing business outside one’s home country). Two important considerations determine foreign entries: (1) strategic goals and (2) cultural and institutional distances.

Location-specific advantages are the benefits a firm reaps from the features specific to a place. For example, Miami is a nice port for both North American and Latin American firms and Dubai is a good stopping point for air traffic between Europe, Asia, and Africa. Besides such geographical benefits, advantages can also come from agglomeration.

There are four strategic goals for firms:

1. Natural resource-seeking firms. For instance, for oil, firms should enter Middle Eastern or the Russian market.
2. Market-seeking firms. For instance, entering the Chinese market may deliver many consumers.
3. Efficiency-seeking firms. For instance, entering a country with low wages.
4. Innovation-seeking firms. For instance, entering a market with agglomeration in the tech world (such as Silicon Valley).

Keep in mind that location-specific advantages can change over time, necessitating firms to relocate.

Cultural distance is the difference between two cultures along identifiable dimensions such as individualism. Institutional distance is the extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries. For instance, many beauty products do not enter into very orthodox, religious societies.

Some argue that firms had best enter into foreign markets with similar cultures and then make their way in to cultures that are more “distant” (a stage model). Others, however, argue that strategic goals are more important than cultural factors.

When to enter?

What is this paragraph’s learning objective? To be able to compare and contrasts first-mover and late-mover advantages (when to enter).

Not only location, but also timing matters in entering a foreign market. First-mover advantages are benefits that accrue to firms that enter the market first and that late entrants do not enjoy. For instance, Google has had such a huge advantage that the brand name has become a verb (to “google it”). Late-mover advantages, on the other hand, are benefits that accrue to firms that enter the market later and that early entrants do not enjoy.

Possible first-mover advantages:

• Proprietary, technological leadership
• Preemption of scarce resources
• Establishment of entry barriers for late entrants
• Avoidance of clash with dominant firms at home
• Relationships with key stakeholders such as governments

Possible late-mover advantages:

• Opportunity to free ride on first mover investments
• Resolution of technological and market uncertainty
• First mover’s difficulty to adapt to market changes

Despite much research, it is not yet clear which strategy is generally better.

How to enter?

What is this paragraph’s learning objective? To be able to follow the comprehensive model of foreign market entries (how to enter).

The scale of entry is the amount of resources committed to entering a foreign market. The advantage of a large-scale entry is that is show commitment, but the disadvantages are limited strategic flexibility and possible large losses. Small-scale entries, on the other hand, are less costly, but can prove difficult to build a good market share.

A mode of entry is the method used to enter a foreign market. There are generally two types: non-equity modes, modes of entry that reflects relatively smaller commitments to overseas markets. These modes can be divided into (1) exports and (2) contractual agreements. Type are equity modes, modes of entry that indicate a relatively larger, harder-to-reverse commitment. These types can also be divided into two categories: (3) partially owned subsidiaries and (4) wholly owned subsidiaries.

The distinction between equity and non-equity modes is important, because it defines what an MNE is: MNEs enter foreign markets via equity modes through FDI.

What follows is a three-layered list, so there are several different modes of entry (e.g. direct exports or indirect exports) within modes of entry (e.g. exports or contractual agreements) within modes of entry (e.g. equity or non-equity):

1. Non-equity modes: exports
   • Direct exports, the most basic mode of entry.
     • Advantages: economies of scale in production concentrated in home country; better control over distribution.
     • Disadvantages: high transportation costs for bulky products; marketing distance from customers; trade barriers and protectionism.
   • Indirect exports, exporting through domestically based export intermediaries.
     • Advantages: focus on production; avoid export processes
     • Disadvantages: less control over distribution; inability to learn how to compete overseas.
2. Non-equity modes: contractual agreements
   • Licensing/franchising, selling the rights to intellectual property such as patents and know-how.
     • Advantages: low development costs; low risk in overseas expansion.
     • Disadvantages: little control over technology and marketing; may create competitors; inability to engage in global coordination.
   • Turnkey projects, projects in which clients pay contractors to design and construct new facilities and train personnel. One form is the build-operate-transfer (BOT) agreement, a non-equity mode of entry used to build a longer-term presence by building and then operating a facility for a period of time before transferring operations to a domestic agency or firm.
     • Advantages: ability to earn returns from process technology in countries where FDI is restricted.
     • Disadvantages: may create efficient competitors; lack of long-term presence.
   • R&D contracts, an outsourcing agreement in R&D between firms.
     • Advantages: ability to tap into the best locations for certain innovations at low costs.
     • Disadvantages: difficult to negotiate and enforce contracts; may nurture innovative competitors; may lose core innovation capabilities.
   • Co-marketing, efforts among a number of firms to jointly market their products and services.
     • Advantages: ability to reach more customers.
     • Disadvantages: limited coordination.
3. Equity modes: partially owned subsidiaries
   • Joint ventures (JV), new corporate entities created and jointly owned by two or more parent companies.
     • Advantages: sharing costs, risks, and profits; access to partners’ assets; politically acceptable.
     • Disadvantages: divergent goals and interests of partners; limited equity and operational control; difficult to coordinate globally.
4. Equity modes: wholly owned subsidiaries (WOS), subsidiaries located in a foreign country that are entirely owned by the parent multinational.
   • Greenfield operations, building factories and offices from scratch (on a proverbial piece of “greenfield” formerly used for agricultural purposes).
     • Advantages: complete equity and operational control; protection of know-how; ability to coordinate globally.
     • Disadvantages: potential political problems and risks; high development costs; add new capacity to industry; slow entry speed (relative to acquisitions).
   • Acquisitions
     • Advantages: same as Greenfield (above); do not add new capacity; fast entry speed.
     • Disadvantages: same as Greenfield (above), except adding new capacity and slow speed; post-acquisition integration problems.

What are some important debates and extensions on entering foreign markets?

What is this paragraph’s learning objective? To be able to participate in three leading debates concerning foreign market entries.

Under some circumstances, foreignness might actually be an asset. For example, German cars have a good reputation. Therefore, this is known as the country-of-origin-effect, the positive or negative perception of firms and products from a certain country. Though, there still remain many examples where foreignness is a liability.

Most MNEs, though often talked about as “global” expansion, very are truly global (as they are often mostly centered in Asia, Europe, or North America (the triad)). Some of these companies can continue to globalize, whereas others already need to downsize. So, keep in mind the limitations of the use of “global.”

MNEs possess OLI (ownership, location, internalization) advantages. However, MNEs from emerging economies such as China sometimes have LLL advantages, a firm’s quest of linkage (L), leverage (L), and learning (L) advantages. A framework advocated by John Mathews (Mathews, 2006, Dragon Multinationals: Emerging Players in 21^st century globalization, 5-27).

How do firms deal with global competitive dynamics? - Chapter 11

Competitive dynamics are actions and response undertaken by competing firms. Before undertaking such actions, firms want to make a competitor analysis, a process of anticipating rivals’ actions in order to both revise a firm’s plan and prepare to deal with rivals’ response.

How do firms compete, cooperate, and collude?

What is this paragraph’s learning objective? To be able to understand the industry conditions conducive to cooperation and collusion.

Adam Smith already wrote about collusion the collective attempt between competing firms to reduce competition. Cooperation and collusion are generally the same thing, though cooperation has a more positive connotation. Collusion can be tacit or explicit. Tacit collusion happens when firms indirectly coordinate actions by signaling their intention to reduce output and maintain pricing above competitive levels. Explicit collusion happens when firms directly negotiate output and pricing and divide markets. In such cases, a cartel (trust) is formed, an output-fixing and price-fixing entity involving multiple competitors. Trusts reduce competition, so many countries have developed antitrust laws, laws that make cartels (trusts) illegal. Collusion can sometimes suffer from a prisoner’s dilemma, a situation wherein the outcome depends on two parties deciding whether to cooperate or defect (betray the other party). In such a situation, it is most profitable all-round for the two parties to trust each other and cooperate, most profitable for one party to “cheat” and betray the other party, but least profitable if both parties cheat and betray each other. Since one party does not know whether the other party will betray them, the alliance is unsure. This is derived from game theory, a theory that studies the interactions between two parties that compare and/or cooperate with each other.

There are certain industry characteristics that either incentivize or disincentivize collusion. There are five factors:

• Concentration ratio, the percentage of total industry sales accounted for by the top four eight, or twenty firms. The higher the concentration, the easier it is to collude.
• The existence of a price leader, a firm that has a dominant market share and sets “acceptable” prices and margins in the industry. If there is such a firm, the possibility of collusions is higher. Such a leader often has the capacity to punish, meaning it has sufficient resources to deter and combat defection.
• An industry with homogenous products has a higher possibility of collusion than one with heterogeneous products.
• An industry with high entry barriers has a higher possibility of collusion than one with low entry barriers.
• Market commonality, the overlap between two rivals’ markets. When there is a high degree of market commonality, this may restrain firms from attacking each other. Multimarket competition is when firms engage the same rivals in multiple markets. Mutual forbearance is when multimarket firms respect their rivals’ spheres of influence in certain markets and their rivals reciprocate, leading to tacit collusion. Such caution comes from two factors: (1) deterrence and (2) familiarity. Deterrence among multimarket competition arises because of crossmarket retaliation, retaliatory attacks on a competitor’s other markets if this competitor attacks a firm’s original market. Familiarity happens when two firms have a very good idea of the competitor’s actions, intentions, and capabilities.

How do institutions govern domestic and international competition?

What is this paragraph’s learning objective? To be able to outline how formal institutions affect domestic and international competition.

In domestic competition, formal institutions governing competition come from competition policy, government policy governing the rules of the game in competition. As we have seen earlier, one important aspect is antitrust policy, government policy designed to combat monopolies and cartels. Such policies can vary between countries. The US government thinks it is “fair” to promote entry to markets and “unfair” for large firms to raise entry barriers and to fix prices. In Japan, on the other hand, “fair” means that firms who have invested much time, energy, and resources in a certain industry deserve to be protected. So, in the US policies are pro-competition and pro-consumer, whereas in Japan they are pro-incumbent and pro-producer. Competition and antitrust policies focus mostly on (1) collusive price setting and (2) predatory pricing. Collusive price setting is price setting by monopolists or collusion parties at a level higher than the competitive level. Predatory pricing is an attempt to monopolize a market by setting prices below cost and intending to raise prices to cover losses in the long run after eliminating rivals.

In international competition, formal institutions governing competition have to deal with dumping, an exporter selling goods below cost. This is similar to predatory pricing. This is an important reason for antidumping laws, laws that make it illegal for an exporter to sell goods below cost abroad with the intent to raise prices after eliminating local rivals. In the international economy, this often means that countries’ governments discriminate against foreign firms by imposing “antidumping laws” on certain practices, while they would not impose such laws domestically (which they could do under “antitrust laws”), in an attempt to advance domestic firms. There are several real-life examples of such discriminatory practices and they can be highly effective (so, not simply the “background” against which international firms operate).

How do resources and capabilities influence competitive dynamics?

What is this paragraph’s learning objective? To be able to articulate how resources and capabilities influence competitive dynamics.

Using a VRIO analysis, competitive dynamics work as follows:

• Value is created by working simultaneously in different markets, for example, but also by claiming patents.
• Some firms have more rarity than others. This can be by nature (great location), nurture (good management and government support) or both.
• Firms try to imitate each other to become more competitive, but this can sometimes be hard.
• Some firms are organizationally set up for aggressive takeover.

Resource similarity is the extent to which a given competitor possesses strategic endowment comparable, in terms of both type and amount, to those of the focal firm. Firms who have such a similarity in resources fight very often. Resource similarity and market commonality go together very well for a rival analysis:

• Low resource similarity and high market commonality? Lowest intensity of rivalry.
• High resource similarity and high market commonality? Second lowest intensity of rivalry.
• Low resource similarity and low market commonality? Second highest intensity of rivalry.
• High resource similarity and low market commonality? Highest intensity of rivalry.

How and why do firms attack, counterattack, and signal such actions?

What is this paragraph’s learning objective? To be able to identify the drivers for attacks, counterattacks, and signaling.

An attack is an initial set of actions to gain competitive advantage. A counterattack is a set of actions in response to such an attack. Unopposed attacks are more likely to succeed, so when a firm attacks, they must be wary of three drivers for counterattacks: (1) awareness, (2) motivation, and (3) capability:

• If an opponent is not aware of an attack, they will not be able to counterattack, so the goal of the attack is more likely to be achieved.
• Motivation matters. When opponents are not motivated to counterattack, for instance because the attacked market does not have much value, the goal is more likely to be achieved. One strategy for this is the blue ocean strategy, a strategy that focuses on developing new markets (“blue ocean”) and avoids attacking core markets defended by rivals, which is likely to result in a bloody price war (“red ocean”).
• Finally, if a firms wants to counterattack, it must—of course—have the right capabilities.

Some firms cooperate (collude) and some become competitive (attack and counterattack). How does a firm indicate its intentions, without talking to rivals (which is illegal). They use signaling, which comes in four ways:

• Firms enter new markets to seek mutual forbearance by establishing multimarket contact.
• Firms can send a truce signal, for example by talking about their intentions to the media (very unambiguous and obvious).
• Firms can call for a “government investigation,” wherein they do get to hold negotiations with direct rivals.
• Firms can organize an alliance to reduce costs (this is legal), which has the same effect as raising prices.

How do local firms compete with MNEs?

What is this paragraph’s learning objective? To be able to discuss how local firms fight multinational enterprises.

Depending on (1) industry pressures to globalize and (2) the nature of competitive assets, local firms can opt for four strategies in competing with MNEs:

• When a local firm has assets that are customized to home markets and is in an industry with a low pressure to globalize, it can opt for a defender strategy, a strategy that centers on local assets in areas in which MNEs are weak.
• When a local firm has assets that are transferable abroad and is in an industry with a low pressure to globalize, they can opt for an extender strategy, a strategy that centers on leveraging homegrown competencies abroad.
• When a local firm has assets that are customized to home markets and is in an industry with a high pressure to globalize, it can opt for a dodger strategy, a strategy that centers on cooperating through joint ventures with MNEs and selloffs to MNEs.
• When a local firm has assets that are transferable abroad and is in an industry with a high pressure to globalize, it can opt for a contender strategy, a strategy that centers on a firm engaging in rapid learning and then expand overseas.

There are definitely stories of success here. In China, for example, there are several markets where domestic firms have an increasing market share, whereas MNEs started out very successfully.

What are some important debates and extensions on competitive dynamics?

What is this paragraph’s learning objective? To be able to participate in two leading debates concerning competitive dynamics.

The first debate focuses on competition versus antidumping. There are two arguments against antidumping laws: the first is that it is unclear what “below cost” dumping means. The second is that it is, in fact, highly competitive, and therefore positive, to dump below cost. Why should we complain if foreign firms sell cheap? The response, however, is that it is “unfair” to sell so cheap. Moreover, it can lead to a monopoly (and, thus, high prices) in the long term, after the dumping firm’s rivals have been defeated. One solution is to apply antidumping policies in the same way as a government would apply antitrust policies focusing on predatory pricing to domestic firms. In other words, hold every firm to the same standard and do not discriminate.

Another debate focuses on competitive strategy versus antitrust policies. Most managers of firms do not necessarily study economics and law, while most antitrust officials do not necessarily study global business. This can lead to frustration on both sides, because the antitrust officials will enforce laws they think are necessary to prevent monopolies, while business students believe that no competitive advantage lasts forever.

How do firms make alliances and acquisitions work? - Chapter 12

How do we define alliances and acquisitions?

What is this paragraph’s learning objective? To be able to define alliances and acquisitions.

Strategic alliances are voluntary agreements of cooperation between firms. Contractual (non-equity-based) alliances are alliances between firms that are based on contracts and do not involve the sharing of ownership. Examples are co-marketing and R&D contracts. Equity-based alliances are alliances based on ownership or financial interest between the firms. These include strategic investment, one firm investing in another as a strategic advisor, and cross-shareholding, where both firms investing in each other become cross-shareholders. A joint-venture (JV) is also an example of an equity-based alliance. An acquisition is a transfer of the control of operations and management from one firm (target) to another (acquirer), the former becoming a unit of the latter. A merger, on the other hand, is a combination of operations and management of two firms to establish a new legal entity.

We often talk about “mergers and acquisitions,” but in reality acquisitions are much more frequent.

How do institutions and resources affect alliances and acquisitions?

What is this paragraph’s learning objective? To be able to articulate how institutions and resources influence alliances and acquisitions.

The institution-based view suggests that institutions affect how a firm chooses alliance and acquisitions in terms of its strategy. The resource-based view, on the other hand, contends that even though the rules of the game are the same for every firm, firm-specific resources allow a firm to excel.

Formal institutions affect alliances and acquisitions along two dimensions: (1) antitrust concerns and (2) entry mode requirements. Antitrust regulations are more likely to allow alliances than acquisitions, because acquisitions actually eliminate a competitor and alliances do not. Formal market entry requirements can also dissuade firms from acquisitions, thereby leaving alliances open as the only option. Recently, however, a trend has been established toward more liberal policies on such entry mode requirements—which has led to a decline in JVs and an increase in the number of acquisitions in emerging economies. However, many countries still impose entry requirements to protect domestic firms from becoming foreign assets.

Informal institutions also influence alliances and acquisitions. Sometimes firms want to associate themselves with other firms’ reputations, so they will try to make an alliance or an acquisitions of such firms. Firms need to do their due diligence, an investigation prior to signing contracts, because they might make a bad alliance or acquisition. In some cases, making alliances can become an internalized, taken-for-granted norm. Thus, such an informal institution influences firm behavior.

Resources and capabilities also influence alliances, according to the VRIO analysis:

• Value must be created in order for an alliance or acquisition to make sense. There are three mains ways for this:
  • Reducing costs, risks, and uncertainties
  • Accessing complementary assets and learning opportunities
  • Possibilities to use alliances as real options, investments in real operations as opposed to financial capital (two steps are involved in this: (1) first, an investor makes a relatively small investment to buy an option, which leads to the right to make a future investment without being obligated to do so and (2) after that, the investor holds the option until a decision point arrives in the second phase, and then decides between exercising the option or abandoning it).

However, there can also be disadvantages:

• • Choosing the wrong partners
  • Partners’ possible opportunism
  • The risk of helping to nurture competitors (learning race, in which partners aim to outrun each other by learning the “tricks” from the other side as fast as possible)
• Rarity: relational (collaborative) capabilities are the ability to manage interfirm relationships. These can be rare, as most managers are educated in competition instead of collaboration.
• Imitability: there are two levels to this:
  • The firm level: A firm’s capabilities might be imitated by other firms.
  • The alliance level: a specific alliance between firms can be hard to imitate. What is it, exactly, that makes a specific relationship work and how do you copy that?
• Organization: When individuals have such a hard time keeping up relationships (50% of all marriages fail), it is no wonder that large organizations have issues as well.

Resources and capabilities also influence acquisitions, according to the VRIO analysis:

• Value: many acquisitions fail to create value, around 70%. Many times, only the shareholders profit, because of the acquisition premium, the difference between the acquisition price and the market value of target firms.
• Rarity: for an acquisition to work, there must be a specific rarity to at least one firm.
• Imitability: Firms that excel in acquisitions often have hardto-imitate integration capabilities.
• Organization: Many times, how successful an acquisition turns out to be boils down to the organizational structure. Preacquisition analysis often focuses on strategic fit, the effective matching of complementary strategic capabilities. However, oftentimes firms overlook the organizational fit, the similarity in cultures, systems, and structures.

How are alliances formed?

What is this paragraph’s learning objective? To be able to describe how alliances are formed.

There are three stages:

Stage one: To cooperate or not to cooperate?

• Market transactions
• Pursue cooperative interfirm relationship
• Mergers and acquisitions

Stage two: contract or equity?

• Contract. Below follows stage three: specifying the relationship:
  • Co-marketing
  • R&D contracts
  • Turnkey project
  • Strategic supplier/distributor
  • Licensing/franchising
• Equity. Below follows stage three: specifying the relationship:
  • Strategic investment
  • Cross-shareholding
  • Joint venture

In stage two, there are four driving forces in choosing between a contract- or equity-based approach.

• Nature of shared resources and capabilities (degree of tacitness (hard to describe and codify or not?))
  • For equity-based alliances: high
  • For non-equity-based alliances: low
• Importance of direct organizational monitoring and control
  • For equity-based alliances: high
  • For non-equity-based alliances: low
• Potential as real options
  • For equity-based alliances: high (possible upgrade to M&As)
  • For non-equity-based alliances: high (for possible upgrading to equity-based relationships
• Influence of formal institutions
  • For equity-based alliances: high (when required or encouraged by regulations)
  • For non-equity-based alliances: high (when required or encouraged by regulations)

What does the evolution and dissolution of alliances look like?

What is this paragraph’s learning objective? To be able to outline how alliances are evolved an dissolved.

One issue with alliances is the potential of opportunism from the other firm. How do firms combat this? First, a firm can wall off critical capabilities, and second, a firm can swap critical capabilities through credible commitments. A metaphor for the first strategy is a couple placing certain assets in a prenuptial agreement. The second approach is the exact opposite of that: they hold nothing back in their commitment to the alliance and they hold each other’s assets hostage in preventing betrayal.

Alliances are often described as marriages. So what happens when firms go from marriage to divorce? It starts with the “initiation” of one of the partners, showing their discontent. When that is not picked up or fixed, the problem can escalate. One example of this is a firm going public with its problems in the alliance, to win public sympathy. After this comes the uncoupling phase, which can be friendly or hostile. Finally, in the aftermath phase, oftentimes “divorced” firms will try to look for a new partner.

How do alliances perform?

What is this paragraph’s learning objective? To be able to discuss how alliances perform.

There are four factors that can affect alliance performance: (1) equity, (2) learning and experience, (3) nationality, and (4) relational capabilities.

• Greater equity can signal a greater commitment.
• Successfully learning from a partnership is important in its performance, and this is often measured in experience.
• Nationality refers to the fact that firms with the same backgrounds often perform better.
• Relational capabilities, obviously, affect if a relationship (alliance) is going to work or not.

What are important motives for acquisitions?

What is this paragraph’s learning objective? To be able to explain why firms undertake acquisitions.

There are three potential motives for acquisition: (1) synergistic, (2) hubristic, and (3) managerial. Synergistic motives add value, but hubristic and managerial motives—in theory—reduce value. Hubris is the overconfidence in one’s capabilities. Managerial motives are managers’ desire for power prestige, and money, which may lead to decisions that do not benefit the firm overall in the long run.

• Synergistic:
  • From an institution-based view: respond to formal institutional constraints and transitions.
  • From a resource-based view: leverage superior managerial capabilities, enhance market power and scale economies, and access to complementary resources.
• Hubristic:
  • From an institution-based view: herd behavior—following norms and chasing fads of M&As.
  • From a resource-based view: managers’ overconfidence in their capabilities
• Managerial:
  • From an institution-based view: self-interested actions such as empire-building guided by informal norms and cognitions.
  • From a resource-based view: n/a

How do acquisitions perform?

What is this paragraph’s learning objective? To be able to understand why acquisitions fail often.

There are two phases in which problems present themselves: the pre-acquisition phase and the post-acquisition phase. There are several different potential problems within each of these phases, divided into two categories: all M&As and cross-border M&As.

• Preacquisition (overpayment for targets):
  • For all M&As:
    • Managers overestimate their ability to create value
    • Inadequate pre-acquisition screening (due diligence)
    • Poor strategic fit
  • For cross-border M&As, specifically:
    • Lack of familiarity with foreign cultures, institutions, and business systems
    • Inadequate number of worthy targets
    • Nationalistic concerns against foreign takeovers (political and media levels)
• Postacquisition (failure in integration):
  • For all M&As:
    • Poor organizational fit
    • Failure to address multiple stakeholder groups’ concerns
  • For cross-border M&As, specifically:
    • Clashes of organizational cultures compounded by clashes of national cultures
    • Nationalistic concerns against foreign takeovers (firm and employee levels)

What are some important debates concerning alliances and acquisitions?

First, the debate of alliances versus acquisitions. Many firms make the mistake of not investigating all their options properly. Compared with acquisitions, alliance cost less and allow for opportunities to learn from working with each other. Alliances do not preclude acquisitions, but acquisitions do preclude alliances.

Second, the debate of majority joint venture as control mechanism versus minority joint venture as real option. This is a debate on the appropriate level of equity in JVs. Some arguments are straightforward: having a majority share gives one more control (positive), but it can lead to hostility with local partners, especially in cases of western MNEs (negative). An additional argument for minority JV is exercising real options. Generally speaking, the more uncertain the conditions, the higher the value of real options. So, when the conditions of an M&A or a majority JV are uncertain for specific reasons, it might be advisable to go for a minority JV instead—as a possible stepping stone.

What is the importance of multinational strategy, structure, and learning? - Chapter 13

What is the relationship between multinational strategies and structures?

What is this paragraph’s learning objective? To be able to describe the relationship between multinational strategy and structure.

MNEs confront two sorts of pressures: cost reduction and local responsiveness. The integration-responsiveness framework is a framework for managers to deal with both pressure simultaneously. Cost pressure often call for global integration, while local responsiveness, the necessity to be responsive to different customer preferences around the world, pushes MNEs to adapt locally. It is difficult to do both at the same time. Even though global consumer taste is converging, many experiments to integrate a product globally with the least possible adaptations locally have failed.

There are four strategic choices to succeed in this dilemma, based on the integration-responsiveness framework: (1) home replication, (2) localization, (3) global standardization, and (4) transnational. There are advantages and disadvantages to each of these.

• Home replication strategy, a strategy that emphasizes the duplication of home countrybased competencies in foreign countries.
  • Advantages:
    • Leverages home country-based advantages
    • Relatively easy to implement
  • Disadvantages:
    • Lack of local responsiveness
    • May result in foreign customer alienation
• Localization (multidomestic) strategy, a strategy that focusses on a number of foreign countries/region, each of which is regarded as a standalone local (domestic) market worthy of significant attention and adaptation:
  • Advantages:
    • Maximizes local responsiveness
  • Disadvantages:
    • High costs due to duplication of efforts in multiple countries
    • Too much local autonomy
• Global standardization strategy, a strategy that focuses on development and distribution of standardized products worldwide in order to reap the maximum benefits from lowcost advantages. Two important concepts in this strategy are center of excellence, an MNE subsidiary explicitly recognized as a source of important capabilities, with the intention that these capabilities be leveraged by, and/or disseminated to, other subsidiaries, and worldwide (global) mandate, a charter to be responsible for one MNE function throughout the world:
  • Advantages:
    • Leverages low-cost advantages
  • Disadvantages:
    • Lack of local responsiveness
    • Too much centralized control
• Transnational strategy, a strategy that endeavors to be simultaneously cost efficient, locally responsive, and learningdriven around the world:
  • Advantages:
    • Cost efficient while being locally responsive
    • Engages in global learning and diffusion of innovations
  • Disadvantages:
    • Organizationally complex
    • Difficult to implement

Remember that, given the various pros and cons, there is no “best” strategy.

There are four organizational structures that fit with the above mentioned strategies: (1) international division, (2) geographic area, (3) global product division, and (4) global matrix.

• An international division is an organizational structure that is typically set up when firms initially expand abroad, often engaging in a home replication strategy. This structure is often phased out after a while.
• A geographic area structure is an organizational structure that organizes the MNE according to different geographic areas (countries and regions). Usually there will be a country (regional) manager. Each area is largely stand alone. Both the strengths and weaknesses of this structure lie in its local responsiveness: while being locally responsive can be a virtue, it also encourages the fragmentation of the MNE into fiefdoms.
• A global product division structure is an organizational structure that assigns global responsibilities to each product division. This structure is highly responsive to pressure for cost efficiencies, because it allows for consolidation on a worldwide basis and reduces inefficient duplication in multiple countries. However, local responsiveness suffers.
• A global matrix is an organizational structure often used to alleviate the disadvantages associated with both geographic area and global product division structures, especially for MNEs adopting a transnational strategy. However, this structure is often difficult to deliver. Put simply, having two bosses (that are often in conflict!) can lead to frustration. This structure thus slows down decision speed.

Thus, the relationship between strategy and structure is reciprocal. Three ideas stand out in this:

• Strategy naturally drives structure.
• The relationship is not one way (so, structure also drives strategy)
• Neither strategy nor structure is static. There is change over time.

How do institutions and resources affect MNE strategies, structures, and learning?

What is this paragraph’s learning objective? To be able to explain how institutions and resources influence strategy, structure, and learning.

Formal and informal institutions affect (1) external relationships and (2) internal relationships.

• External relationships
  • Formal institutions influence these by making the rules of the game. For example, in protecting its domestic employment, a government can tax foreign earnings of MNEs at a higher rate than domestic earnings.
  • Informal institutions can do the same. In some countries, such higher taxation is not formally implemented, but unemployment remains a public—and thus informal—issue.
• Internal relationships
  • Formal laws can influence how a firm is organized internally.
  • The same goes for informal values and norms. For example, which nationality the head of a firm has, can depend on its home-country or host-country’s values. Most Japanese MNEs have a Japanese national (home-country national) at the head of their foreign subsidiaries. European MNEs, on the other hand, more often appoint a host-country or third-country national at the head of a subsidiary. Another informal rule is that most MNEs appoint top executives (CEOs and board members) from the home-country, though this has increasingly led to criticism of a “glass ceiling” and “corporate imperialism.”

Resources and capabilities also have an effect. We look at this from a VRIO framework:

• Value: this is most important in making structural changes.
• Certain structures or strategies can be in vogue and in such cases, it can be profitable to take on a structure that it rarer.
• A new structure must also be hardto-imitate. Generally speaking, formal structures are easier to imitate than informal structures.
• Organizational culture, the collective programming of the mind that distinguishes the members of one organization from another, is important in taking on a specific strategy or structure.

Why are worldwide learning, innovation, and knowledge management important?

What is this paragraph’s learning objective? To be able to outline the challenges associated with learning, innovation, and knowledge management.

Knowledge management refers to the structures, processes, and systems that actively develop, leverage, and transfer knowledge. Knowledge management is highly associated with information management, and thus with IT, but it entails more than that. There is explicit knowledge, knowledge that is codifiable (can be written down and transferred with little loss of richness) and tacit knowledge, knowledge that is non-codifiable, whose acquisition and transfer require hands-on practice.

Below is a table showing differences in knowledge management among four types of MNEs.

R&D represents a crucial arena for knowledge management. The intensification of competition for innovation drives the globalization of R&D. This can sometimes lead to agglomeration, as we have seen before.

There are recurring problems in knowledge management in five areas: knowledge acquisition, knowledge retention, knowledge outflow, knowledge transmission, and knowledge inflow.

• Knowledge acquisition: failure to share and integrate external knowledge
• Knowledge retention: employee turnover and knowledge leakage
• Knowledge outflow: “How does it help me?” syndrome and “knowledge is power” mentality
• Knowledge transmission: inappropriate channels. A problem here is global virtual team, a team whose members are physically dispersed in multiple locations in the world and often operate on a virtual basis, because such teams can have communication barriers. Also, there is the problem of (lack of) absorptive capacity, the ability to recognize the value of new information, assimilate it, and apply it.
• Knowledge inflow: “not invented here” syndrome and absorptive capacity

In response to such problems, MNEs have come up with a new model, open innovation, the use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation. Knowledge management is best facilitated by informal social capital, the informal benefits individuals and organizations derive from their social structures and networks. The micro informal interpersonal relationships among managers of various units may greatly facilitate macro intersubsidairy cooperation among various units—a micro-macro link.

What are some important debates on strategizing, structuring, and learning around the world?

What is this paragraph’s learning objective? To be able to participate in two leading debates concerning multinational strategy, structure, and learning.

An important debate on managing large firms is centralization versus decentralization. A more decentralized management can facilitate subsidiary initiative, the proactive and deliberate pursuit of new opportunities by a subsidiary. However, it can be difficult to distinguish between a good initiative and opportunism.

Another debate focuses on juggling the three dimensions of integration, responsiveness, and learning. Instead of engaging with this, some MNEs have come up with customer-focused dimensions. The first is a global account structure, a customer-focused dimension that supplies customers (often other MNEs) in a coordinated and consistent way across various countries. The second is a solutions-based structure, a customer-focused solution in which a provider sells whatever combination of goods and services the customers prefer, including rivals’ offerings.

How do firms market their products and keep up their supply chain effectively? - Chapter 14

Marketing refers to the efforts to create, develop, and defend markets that satisfy the needs and want of individual and business customers. A supply chain is the flow of products, services, finances, and information that passes through a set of entities from a source to the customer. Supply chain management, then, refers to the activities to plan, organize, lead, and control the supply chain. Marketing and the supply chain should be viewed not as separate functions, but as one integrated function.

What are three of the four Ps in marketing?

What is this paragraph’s learning objective? To be able to articulate three of the four Ps in marketing (product, price, and promotion) in a global context.

The marketing mix, the four underlying components of marketing, consists of (1) product, (2) price, (3) promotion, and (4) place.

Product is the offering that customers purchase. This originally referred to a physical product, but nowadays services are included as well. One important concern for MNEs concerning products is whether they should standardize them, or localize them (so, adapt a product to a new place or not). Localization is thus appealing, but expensive. In deciding whether to market global brands or local brands, MNEs can look to market segregation, identifying segments of consumers who differ from others in purchasing behavior (for example, males and females). In a global perspective, there are four primary categories: global citizens (who favor global brands with prestige), global dreamers (who cannot afford, but admire global brands), anti-globals (who are most likely to lead anti-globalization demonstrations), and global agnostics (who are skeptical about whether global brands deliver higher-quality goods).

Price is the expenditures that customers are willing to pay for a product. This changes over time, which leads to a change in demand. That is called price elasticity. With most products demand will go up as prices go down, but the more interesting question is how much? Another dimension of price is the total cost of ownership, the total cost needed to own a product, consisting of initial purchase cost and follow-up maintenance/service cost.

Promotion is defined as the communications that marketers insert into the marketplace. It includes all advertising, personal selling, and public relations. With promotion, too, there is the choice of whether to standardize or localize. Another challenge lies in whether to promote online or offline.

How does the fourth P fit into the picture?

What is this paragraph’s learning objective? To be able to explain how the fourth P in marketing (place) has evolved to be labeled supply chain management.

Place refers to the location where products and services are provided (including the online marketplace, of course). Place is also often referred to as the distribution channel, the set of firms that facilitates the movement of goods from producers to consumers. This has become increasingly since the 1980s, as most companies no longer produce in-house, but outsource this work. This more complex process is now referred to as the “supply chain.”

What are the triple “As” in the supply chain?

What is this paragraph’s learning objective? To be able to outline the triple As in supply chian management (agility, adaptability, and alignment).

Agility is the ability to react quickly to unexpected shifts in supply and demand. Such unexpected shifts are becoming more frequent in the 21^st century, so agility is becoming increasingly important. One way some companies have become more agile is by making trucks, ships, and planes of their suppliers as their warehouses.

Adaptability is the ability to change supply chain configurations in response to longer-term changes in the environment and technology. Enhancing adaptability often involves making a series of make-or-buy-decisions, decisions about whether to produce inhouse (“make”) or to outsource (“buy”).

Alignment refers to the alignment of interests of various players in the supply chain. To be sure, every supply chain is sort of a strategic alliance involving various players, all of which wanting to maximize profit. This can lead to conflict—alignment is meant to overcome/prevent such conflict. There are two ways of achieving this: (1) power and (2) trust. More powerful players can influence the others to adhere to the alignment. Trust, on the other hand, comes from treating each other fairly. Sometimes it can help to install third-party logistics (3PL) providers, neutral, third-party intermediaries in the supply chain that provide logistics and other support services, to overcome trust issues.

How do institutions and resources affect marketing and supply chain management?

What is this paragraph’s learning objective? To be able to discuss how institutions and resources affect marketing and supply chain management.

Formal institutions, of course, have an impact on marketing and supply chain management. Laws that constraint equity levels or taboos in advertising, for example. Informal rules also have an effect. In marketing, blunders can occur due to differences in culture and language.

Resources and capabilities also influence marketing. Following the VRIO framework, an important question is (obviously), does this advertisement add value? Different strategies and processes in the supply chain may also be rare, and hard-to-imitate on an organizational level.

What are some important debates concerning the competition in marketing and supply chain management?

What is this paragraph’s learning objective? To be able to participate in two leading debates concerning marketing and supply chain management.

The first debate focuses on the nature of economic activities. Agriculture is the primary sector and manufacturing is the secondary section, making the service industry the tertial sector. However, the latter is economically much more significant. Much of the economic growth comes form innovations in services. In other words, in today’s economy, integrating manufacturing and services is a necessity.

The second debate is about market orientation versus relationship orientation. Market orientation is a philosophy or way of thinking that places the highest priority on the creation of superior customer value in the market place. Relationship orientation, on the other hand, is the focus to establish, maintain, and enhance relationships with customers. Key to this debate is how firms benefit differently around the world. As a firm, do you invest in better delivery and pricing, or in “wining and dining” clients? The answer to which strategy is more effective also depends on the country: a market orientation is more effective in market economies than in planned economies, for instance.

How do firms manage human resources? - Chapter 15

Human resource management (HRM) refers to the activities that attract, select, and manage employees. This chapter focuses on how firms get the best out of their human resources.

How do firms make staffing decision?

What is this paragraph’s learning objective? To be able to explain staffing decisions with a focus on expatriates.

Staffing refers to HRM activities associated with hiring employees and filling positions. There are two types of employees in MNEs: (1) Host-country nationals (HCNs), individuals from the host country who work for an MNE, and (2) expats. Within expats, there are two categories: (2a) parent-country nationals (PCNs), individuals who come from the parent country of the MNE and work at its local subsidiary, and third-country nationals (TNCs), individuals who are from neither the parent country nor the host country of the MNE. Most MNE employees are HCNs.

Generally speaking, there are three strategies in making staffing decisions. The first is the ethnocentric approach, an emphasis on the norms and practices of the parent company (and the parent country of the MNE) by relying on PCNs. Alternatively, a polycentric approach has an emphasis on the norms and practices of the host country—and is the opposite of an ethnocentric approach. The advantage of this approach is, in short, “when in Rome, do as the Romans do.” Finally, a geocentric approach disregards nationality and has a focus on finding the most suitable managers, who can be PCNs, HCNs, or TCNs. Overall, there is a link between staffing decisions and a firm’s strategy.

Expatriation is the process of selecting, managing, and motivating expatriates to work abroad. Generally speaking, expatriates have four roles: (1) strategist (long-term workers), (2) daily manager (running operations), (3) ambassador (representing the headquarters with subsidiaries, and representing subsidiaries with headquarters), (4) trainer.

However, expatriates often fail. This failure can result in a premature return, unmet business objectives, and/or unfulfilled career-development objectives. Firms can look to avoid such failures by improving in six factors, divided along two dimensions: in the situational dimension, corporate headquarters preferences, host country/subsidiary preferences, and language play a role; in the individual dimension, technical ability and expertise, cross-cultural adaptability, and spouse and family preferences play a role. Firms generally avoid selecting middle-age (forty-something) expatriates, because they often have children. It can be smarter to select either older (in their fifties) expatriates, whose children have left home, or younger (late-twenties, early-thirties) expatriates who have yet to have a family.

What are expats’ and HCNs’ training and development needs?

What is this paragraph’s learning objective? To be able to identify training and development needs for expatriates and host-country nationals.

Training is specific preparation to do a particular job. Development is the long-term, broader preparation to improve managerial skills for a better career.

Expats oftentimes only receive a “good luck,” not actual training. Offering even the simplest of language courses can significantly help expats in the short-term, though long-term expats would ideally receive more extensive language training.

Repatriation, the process of facilitating the return of expats, also deserves more attention from firms. Repatriates, returning expats, learn new knowledge and skills abroad, but upon return to their home country, they often find that managers are more interested in knowledge transfers from headquarters to subsidiary than the other way around. Moreover, expats make a psychological contract, an informal understanding of expected delivery of benefits in the future for current services, when starting an adventure abroad, but they experience anxiety upon return: will their boss deliver?

In short, repatriates’ problems:

• Career anxiety
• Work adjustment
• Loss of status and pay
• Difficult for the spouse and children to adjust

In acquiring the best talent from host countries, firms are increasingly offering very clear training and development plans for hot-shot HCNs.

What are issues with compensation and performance appraisal?

What is this paragraph’s learning objective? To be able to discuss compensation and performance appraisal issues.

Compensation is the determination of salary and benefits. Performance appraisal is the evaluation of employee performance for promotion, retention, or termination purposes.

There are two major approaches to expat compensation: (1) going rate and (2) balance sheet.

• The going rate approach is a compensation approach that pays expatriates the prevailing (gong) rate for comparable positions in a host country.
  • Advantages:
    • Equality among parent-, third-, and host-country nationals in the same location
    • Simplicity
    • Identification with host country
  • Disadvantages:
    • Variation between assignments in different locations for the same employee
    • Reentry problem if the going rate of parent country is les than that of host country.
• The balance sheet approach is a compensation approach that balance the cost of living differences relative to parent country levels and adds a financial inducement to make the package attractive.
  • Advantages:
    • Equity between assignments for the same employee
    • Facilitates expatriate re-entry
  • Disadvantages:
    • Costly and complex to administer
    • Great disparities between expatriates and host-country nationals.

Low-level HCNs often have very little bargaining power and are therefore paid very little. Social activist groups have called this out as exploitation. HCNs in higher positions, on the other hand, have significantly more bargaining power, because they are often top local talent and MNEs have to fight each other for them.

In expat performance appraisal, cultural differences may create problems. Western MNEs want employees to express themselves, but in Asian and Latin American cultures, this can be frowned upon. Therefore, a Western manager may not make an accurate evaluation of an Asian or Latin American employee. Moreover, expats are often the highest-ranking person in a subsidiary, so it can prove difficult to evaluate them. The solutions are visiting the subsidiary more often and relying on former expats now based at headquarters to evaluate current expats.

How do labor relations work in home and host countries?

What is this paragraph’s learning objective? To be able to understand labor relations in both home and host countries.

Labor relations are a firm’s relations with organized labor (unions) in both home and host countries. Firms want to keep costs down, whereas union want increased wages. In the US, unionized workers earn 30% more than non-unionized workers. Naturally, conflict arises between firms and unions. Unions can threaten to strike to get their way, but managers can threaten to take jobs overseas.

When MNEs go abroad, they try to avoid settling in areas where unions are strong. When they do have to deal with unions, they rely on experienced HCNs.

How do institutions and resources influence human resource management?

What is this paragraph’s learning objective? To be able to discuss how the institution-based and resource-based views shed additional light on HRM.

Formal institutions are very important to HRM. Many countries have laws regarding the ease with which firms can fire workers, which directly influence HRM decisions.

Informal institutions also play a role. Japanese MNEs often initially appoint PCNs, while European MNEs are more likely to appoint HCNs and TCNs to lead subsidiaries. Some studies have hypothesized that presumably collectivistic Chinese MNEs would compensate their managers more equally, but in reality, Chinese MNEs compensate their managers more on a merit-based system than American MNEs. Be careful to avoid such stereotypes! One norm that used to exist, but is now changing is that expatriates are offered much more money. If someone wants to be a top manager in an MNE, they really need overseas experience, so people will accept such positions for their career future, not for the money.

From a resource-based view, employees are crucial resources. So, how can certain HR activities increase those resources’ value? For instance, training can add value, but is also expensive.

The rest of the VRIO framework is in place again: HR activities, besides adding value, need to be rare, inimitable, and organizationally embedded.

What are some important debates concerning HRM?

What is this paragraph’s learning objective? To be able to participate in two leading debates concerning HRM.

The first debate focuses on best fit versus best practice. The “best fit” school of thought argues that a firm needs to search for the best external and internal fit. In other words: different situations require different employees. The “best practice” school of thought, on the other hand, argues that firms should adopt “best practices,” regardless of context. Often those “best practices” include good training and high pay for performance. Critics of the “best practice” school make two points: (1) that there is no such thing as universal “’best practice” and (2) if all firms adopt these so-called universal best practices, they actually lose their value.

The second debate focuses on expatriation versus inpatriation. Inpatriation refers to relocating employees of a foreign subsidiary to the MNEs headquarters for the purposes of filling skill shortages at headquarters and developing a global mindset for such inpatriates. The inpatriates are expected to learn at the headquarters and then replace expatriates when they return home. A risk, however, is that, once home, they join a competitor.

How do firms finance and govern the corporation globally? - Chapter 16

Financing is the management of a firm’s money, banking, investments, and credit. Corporate governance is the relationship among various participants in determining the direction and performance of corporations. Those participants are (1) owners, (2) managers, and (3) boards of directors—the “tripod.”

What are the two means of financing decisions?

What is this paragraph’s learning objective? To be able to outline the two means of financing decisions, equity and debt.

Firms’ external sources of financing are equity and debt.

Equity is the stock in a firm (usually expressed in shares), which represents the owners’ rights. These owners are called shareholders. Shareholders purchase stock for dividends and the stock’s potential growth. Debt is a loan that the firm needs to pay back at a given time with an interest. The loan is called a bond, which is held by bondholders. Management has little to say about bonds—they just have to pay them back in time. If not, the firm will be in default, a failure to satisfy the terms of a loan obligation.

Financing decisions are primarily driven by the cost of capital, the rate of return that a firm needs to pay to capital providers. For equity, that is dividend. For bonds, it is the interest. Supply and demand make sure that the larger the pool of capital providers, the lower the cost of capital. Many firms list their stocks globally, not just domestically. Listing shares on a foreign stock exchange is called cross-listing. Such cross-listing brings certain extra costs, but the benefits usually outweigh them, because the cost of capital becomes significantly lower (because of larger supply).

What forms of ownership are there?

What is this paragraph’s learning objective? To be able to differentiate various ownership patterns around the world.

Broadly speaking, there are three patterns of ownership: (1) concentrated versus diffused ownership, (2) family ownership, and (3) state ownership.

When a founder starts up a firm and has complete control, this is called concentrated ownership and control. However, if that firms wants more capital, there will be shareholders. In the US and the UK, around 80-90% of all firms have diffused ownership, publicly traded corporations owned by numerous small shareholders but none with a dominant level of control. In such cases, there is a separation of ownership and control, a dispersal of ownership among many small shareholders in which control is largely concentrated in the hands of salaried, professional managers who own little (or no) equity. This separation of ownership and control is strong in the Anglo-American world, but not so much in the rest of the world.

A large majority of large firms throughout Europe, Asia, Latin American, and Africa feature concentrated family ownership and control. It is unclear whether such family ownership has a positive or negative effect on performances of large firms.

State ownership is the final major form of ownership. Such state-owned enterprises (SOEs) have decreased in frequency since the 1980s. In theory, citizens are all owners in such firms, but in practice they have little to say. Since the 2008 crisis, SOEs have become more frequent again.

What is the role of managers?

Managers are another part of the tripod. Especially important are the top management team (TMT), the team consisting of the highest level of executives of a firm led by the chief executive officer (CEO), the main executive manager in charge of the firm.

The relationship between shareholders and professional managers is a relationship between principals and agents, an agency relationship. Principals are individuals (such as owners) delegating authority. Agents are individuals (such as managers) to whom authority is delegated. Agency theory is a theory that focuses on principal-agent relationships (or in short, agency relationships). Out of this theory comes the insight that when the interests of principles and agents are not aligned, principal-agent conflict will exist. Such conflict leads to agency costs, such as (1) the principals’ costs of monitoring and controlling the agents and (2) the agents’ costs of bonding (signaling their trustworthiness).

Some examples of agency problems are:

• Excessive executive compensation
• Onthe-job consumption (such as corporate jets)
• Lowrisk short-term investments (such as maximizing current earnings while cutting long-term R&D
• Empirebuilding (such a value-destroying acquisitions)
• Excess CEO returns (CEO financial returns in excess of shareholder returns)

CEOs nowadays earn 400 times what the average worker earns (in 1980 this was 40 times). Such problems keep on existing because of information asymmetries, asymmetric distribution and possession of information between two sides: managers know more than shareholders do.

There can also be principal-principal conflicts, conflicts between two classes of principals: controlling shareholders and minority shareholders. For example, when the owning family appoints a family member as CEO. Their position as principal and agent (manager) allows them to go past traditional governing mechanisms. One manifestation of such conflict is expropriation, activities that enrich controlling shareholders at the expense of minority shareholders. For example, personal use of firm resources. This is called tunneling. Tunneling is illegal, but expropriation can also be done legally, through related transactions, controlling shareholders sell firm assets to another firm they own at below-market prices or spin off the most profitable part of a public firm and merge it with another private firm they own.

What is the role of the board of directors?

What is this paragraph’s learning objective? To be able to explain the role of the board of directors.

The board of directors acts as an intermediary between managers and owners. Inside directors are members of the board who are top executives at the firm. The current trend is to introduce more outside (or independent) directors, non-management member of the board. Even though this trend currently exists, there is no academic argument for it.

CEO duality is when the CEO doubles as a chairman of the board. If the board of directors indeed wants to mediate between owners and managers, it seems imperative that a firm avoids such CEO duality. However, a firm led by two individuals can lack unity of command. Here, again, academic research is inconclusive which form is better.

The role of the board of directors is to (1) control management, (2) service management, and (3) acquire resources. Effective control function comes from independence, deterrence (can the board themselves be faulted for bad management?), and norms (don’t mess with the CEO too much).

What are important governance mechanisms?

There are internal and external governance mechanisms, also known as voice-based and exit-based. Voice-based mechanisms are corporate governance mechanisms that focus on shareholders’ willingness to work with managers, usually through the board, by “voicing” their concerns. Exit-based mechanisms are corporate governance mechanisms that focus on exit, indicating that shareholders no longer have patience and are willing to “exit” by selling their shares.

The two voice-based mechanisms are rewards and punishments. In order to motivate good management, they can offer a reward (increase compensation, for instance). Rewards are generally used more than punishments. However, CEO tenure has decreased from 8.1 years in 2000 to 6.3 years in 2012.

In terms of exit-based mechanisms, there are three: (1) market for product competition, (2) market for corporate control, and (3) market for private equity. (1) is a force compelling managers to maximize profits and, thus, shareholder value, but it only complements (2) and (3).

The market for corporate control is the main external governance mechanism, also know as the takeover market or as the mergers and acquisitions (M&A) market. The underlying theory is that when management is poor, stocks will go down and other firms can threaten with takeovers. The net impact of this is positive, because it forces managers to stay close to the goal of shareholders wealth maximization.

The market for private equity works as follows: private equity is equity capital invested in private companies that, by definition, are not publicly traded. This is most often done through leveraged buyouts (LBOs), means by which investors, often in partnership with incumbent managers, issue bonds and use the cash raised to buy the firm’s stock—in essence, LBOs replace shareholders with bondholders.

Overall, the governance mechanisms have since the 1980s turned more toward shareholder capitalism, a view of capitalism that suggests that the most fundamental purpose for firms to exist is to serve the economic interests of shareholders (also known as capitalists).

What is the global perspective on governance mechanisms?

What is this paragraph’s learning objective? To be able to acquire a global perspective on how governance mechanisms vary around the world.

Around the world there are two primary “families” of corporate governance system:

• Corporations in the US and the UK
  • Anglo-American corporate governance models
  • Market-oriented, high-tensions systems
  • Rely mostly on exit-based, external mechanisms
  • Shareholder capitalism
• Corporations in continental Europe and Japan
  • German-Japanese corporate governance models
  • Bank-oriented, network-based systems
  • Rely mostly on voice-based, internal mechanisms
  • Stakeholder capitalism

How do institutions and resources influence corporate finance and governance?

What is this paragraph’s learning objective? To be able to articulate how institutions and resources affect corporate finance and governance.

One explanation for the variance between ownership in the US and the UK on the one hand, and the rest of the world on the other, comes from an institutional framework. Formal legal protection of shareholders in the US and the UK is better than in the rest of the world, especially that of minority shareholders, so this leads to a higher frequency of this particular form of ownership in these countries. Common-law countries, generally speaking, have the strongest legal protection of investors and the lowest concentration of corporate ownership. However, this form is not necessarily better for the economy. Even though the US and the UK have vibrant capital markets, not every country follows their model because of political reasons. Many countries do not have as many investor-protection laws, but rather more employee-protection laws.

Informal institutions also affect corporate governance. There are three sources for the spread of shareholder capitalism: (1) the rise of capitalism (a political, economic, and social movement embracing capitalism—and, thus, capitalists/shareholders), (2) the impact of globalization (more trade, foreign portfolio investments (FPIs), global thirst for capital), and (3) the global diffusion of “best practices” (the worldwide informal acceptance of certain “codes” and “principles” for corporate governance).

From a VRIO framework, only valuable, rare, inimitable, and organizationally sound corporations are able to participate in high-profile stock exchanges such as those in New York and London. Specifically, some of the most valuable, rare, inimitable resources are top managers and directors—the managerial human capital.

What are some important debates on corporate governance?

What is this paragraph’s learning objective? To be able to participate in two leading debates concerning corporate finance and governance.

The first debate focuses on opportunistic agents versus managerial stewards. Managers can be opportunistic and self-serving, but most are trustworthy. As such, agency theory has been criticized as an “anti-management theory of management.” The stewardship theory is a “pro-management” theory that suggests that most managers can be viewed as owners’ stewards interested in safeguarding shareholders’ interests.

The second debate concerns global convergence or divergence. Convergence would suggest that globalization leads to a global adoption of the “best practices.” An example of this is cross-listing, which is driven by the desire to tap into larger pools of capital. Critics, however, contend that context still matters and that corporate governance in different areas of the world requires different choices. They argue that cross-listing make firms converge on paper, but in reality those cross-listed firms do not have to change their style of governance. Thus, the answer of this debate probably lies in the middle.

How do firms manage corporate social responsibility globally? - Chapter 17

This chapter focuses on corporate social responsibility (CSR), the consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks. Central to this concept is the stakeholder, any group or individual who can affect or is affected by the achievement of the organization’s objectives. To be clear: a shareholder is a stakeholder, but a stakeholder is not necessarily a shareholder. Stakeholders can be governments, suppliers, environmental groups, employees, communities, customers, ad social groups.

What is a stakeholder view of a firm?

What is this paragraph’s learning objective? To be able to articulate what is a stakeholder view of the firm.

One key goal for CSR is global sustainability, the ability to meet the needs of the present without compromising the ability of future generations to meet their needs around the world. There are three main sets of drivers here: population increase, poverty, and inequality; NGOs and other civil society stakeholders; and environmental effects such as global warming.

Primary stakeholder groups are constituents on which the firm relies for its continuous survival and prosperity: shareholders, managers, employees, suppliers, etc. Secondary stakeholder groups are those who influence or affect, or are influenced or affected by, the firm but are not engaged in transactions with the firm and are not essential for its survival: environmental groups, fair labor practice groups, etc.

One fundamental aspect of the stakeholder view is that a firm looks beyond economics (profits) only and pursues a set of triple bottom line, economic, social and environmental performance that simultaneously satisfies the demands of all stakeholder groups. This leads to a fundamental debate on the nature of firms. Are they here to make money, or do they also (other) social responsibilities? The trend has been toward shareholder capitalism—abandoning other responsibilities for profit maximization. This is also what free market advocates argue for (and this school of thought is very influential), emphasizing the loss of focus on profit maximization when managers attempt to reach social goals. However, the CSR movement argues that only focusing on profit maximization actually leads to breeding greed, excess, and abuse. Case in point: the 2008 crisis.

There are two driving forces to the CSR movement. The first is the fact that inequality has risen throughout the world, both between developed economies and emerging economies and within developed economies (remember how CEOs are now paid 400 times as much as the average worker). The second is the frequency with which scandals have occurred: oil leaks, excessive bonuses, the Fukushima meltdown.

How do institutions and resources affect corporate social responsibility?

What is this paragraph’s learning objective? To be able to apply the institution-based and resource-based views to analyze CSR.

Generally speaking, firms have four ways of responding to pressures from formal and informal institutions: (1) reactive, (2) defensive, (3) accommodative, and (4) proactive. An example from the US chemical industry in response to environmental pressures:

• Phase 19621970: they had a reactive strategy, a strategy that would only respond to CSR causes when required by disasters and outcries. They denied the severity of environmental problems and argued that these problems could be solved independently through the industry’s technological prowess.
• Phase 19711982: they had a defensive strategy, a strategy that focuses on regulatory compliance but with little actual commitment to CSR by top management. “Congress seems determined to add one more regulation to the already 27 health and safety regulations we must answer to. This will make the EPA a chemical czar. No agency in a democracy should have that authority (1975).
• Phase 19831988: they had an accommodative strategy, a strategy characterized by some support from top managers, who may increasingly view CSR as a worthwhile endeavor. “The EPA has been criticized for going too slow. […] Still, we think that it is doing a good job.” (1982) and “Critics expect an overnight fix. The EPA deserves credit for its pace and accomplishments.” (1982)
• Phase 1989present: they have had a proactive strategy, a strategy that endeavors to do more than is required in CSR. “Green line equals bottom line—The Clean Air Act (CA) equals efficiency. Everything you hear about the ‘costs’ of complying with the CAA is probably wrong… Wiser competitors will rush to exploit the Green Revolution.” (1990)

Of course, much of CSR is still window dressing.

From a resource-based view, a real challenge for CSR is to create value. Many activities firms do can be called social issue participation, firms’ participation in social causes not directly related to the management of primary stakeholders, but they may reduce shareholder value. Oftentimes, CSR resources are not rare either—many parties can choose to adopt green power sources, for example. The same goes for imitability.

The fact that CSR is not necessarily interesting from a resource-based view is called the CSR-Economic Performance Puzzle. CSR advocates look for ways to make CSR economically interesting (though, to be clear, CSR does not hurt economic performance, either).

What are some important debates on CSR?

What is this paragraph’s learning objective? To be able to participate in two leading debates concerning CSR.

The first debate concerns the race to the bottom versus race to the top. The idea, here, is that bringing down pollution in developed economies might lead firms to relocate such activities to emerging economies—making their environment even worse. However, MNEs actually perform better than local companies in such green practices.

The second debate focuses on active versus inactive CSR engagement. Most MNEs are nowadays willing to enter into active CSR engagement, but that attitude goes against the principle of non-intervention in local affairs. The question remains when a firm’s actions are “legitimate” and when they are not. This remains a challenge.

Global Business - Peng - BulletPoints

How should we look at global business? - CH 1

• International business (IB) is 1) a business (firm) that engages in international (cross-border) economic activities and/or 2) the action of doing business abroad. An often-used example of 2) is a multinational enterprise (MNE), which is a firm that engages in foreign direct investment (FDI), which is investment in, controlling, and managing value-added activities in other countries. However, global business, meaning business around the globe, is different from IB because it also includes domestic business activities.
• Most books on IB focus on developed economies, but this book thoroughly examines emerging economies (or emerging markets), the term that has gradually replaced the term “developing countries” since the 1990s. Emerging economies are relevant for global business because, once adjusted for purchasing power parity (PPP)—an adjustment to reflect the differences in cost of living—such economies make up 48% of world trade and contribute around 50% of global gross domestic product (GDP), which is the sum of value added by resident firms, households, and governments operating in an economy. This is different from gross national product (GNP), which is GDP plus income from non-resident sources abroad. The term GNP has been replaced by the World Bank for gross national income (GNI), but they have the same meaning.
• There are three important reasons to study global business:

1. Enhancing your employability and advancing your career in the global economy
2. Better preparation for possible expatriate assignments abroad
3. Stronger competence in interacting with foreign suppliers, partners, and competitors, and in working for foreign-owned employers in your own country

• Globalization is the close integration of countries and people of the world. There are people who are for globalization, who emphasize economic growth and higher standards of living, and people who are critical of globalization, who emphasize the stagnation of wages in rich countries and the exploitation of workers in poor countries.
• The pendulum view holds that globalization is the “closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of the costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders. It is important to note that globalization, according to this view, is not one-directional. This view makes the most sense because it helps understand the ups and downs of globalization.

How do we understand formal institutions: politics, laws, and economics? - CH. 2

• Institutions are the formal and informal rules of the game. Institutional frameworks are formal and informal institutions that govern individual and firm behavior.
• Formal institutions, meaning institutions represented by laws, regulations, and rules, are mainly supported by the regulatory pillar, which is the coercive power of governments. For instance, governments can coerce firms to pay taxes.
• Informal institutions, on the other hand, are institutions represented by cultures, ethics, and norms. Norms are values, beliefs, and actions of relevant players that influence the focal individuals and firms. These informal institutions are mainly supported by the normative pillar, meaning the mechanism through which norms influence individual and firm behavior, and the cognitive pillar, meaning the internalized (or taken-for-granted) values and beliefs that guide individual and firm behavior.
• The main role of institutions is to reduce uncertainty. Uncertainty in business transactions can bring transition cost, which is the cost associated with economic transactions or, more broadly, the costs of doing business.
• An institution-based view thinks of firms’ behavior as the outcome of dynamic interaction between institutions and firms. That is why institutions matter. There are two propositions here:
  • Managers and firms rationally pursue their interest and make choices within the formal and informal constraints in a given institutional framework.
  • While formal and informal institutions combine to govern firm behavior, in situations where formal constraints are unclear of fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and firms.
• Democracy is a political system in which citizens elect representatives to govern the country on their behalf. An important aspect for global business is that individuals have many freedoms, such as expression and organization (including setting up a firm).
• Totalitarianism is a political system in which one person or party exercises absolute political control over the population. There are several forms of totalitarianism: communist totalitarianism (China, Cuba, North Korea, Vietnam), right-wing totalitarianism (formerly in Argentina, Brazil, South Africa), theocratic totalitarianism (Iran, Saudi Arabia), and tribal totalitarianism (Rwanda).
• A legal system refers to the formal rules of the game on how a country’s laws are enacted and enforced.
• No matter what legal system, an important function is always to protect property right, which is the legal right to use an economic property (resource) and to derive income and benefits from it. The term “property” usually refers to something that is tangible, but intellectual property (IP) is intangible property that is the result of intellectual activity. Examples of this are books and videos.
• Intellectual property rights (IPR) mainly include rights associated with (1) patents, (2) copyrights, and (3) trademarks.
• An economic system refers to the rules of the game on how a country is governed economically. There are two extremes: the market economy, and the command economy, with the mixed economy in between.

How do informal institutions govern individual and firm behavior in different countries? - CH. 3

• Informal institutions come from socially transmitted information. Oftentimes people within a given society will view their specific set of informal institutions (i.e. culture, ethics, norms) as morally good. This is called ethnocentrism.
• There are three main ways to understand cultural differences: (1) context, (2) cluster, and (3) dimension approaches.
• Context is the underlying background upon which social interaction takes place. There are low-context cultures, in which communication is usually taken at face value without much reliance on unspoken context; and high-context cultures, in which communication relies a lot on the underlying unspoken context, which is as important as the words used.
• A cluster consists of countries that share similar cultures.
• The dimension approach is the most influential because (1) context is only one dimension and (2) the cluster approach offers little for differences within a cluster. Hofstede et al. propose five dimensions (Hofstede, 1997, Cultures and Organizations: Software of the Mind, 25, 26, 53, 84, 113, 166):
  • Power distance.
  • Individualism-collectivism
  • Masculinity-femininity
  • Uncertainty avoidance
  • Long-term orientation
• Ethics refers to the principles, standards, and norms of conduct that govern individual and firm behavior. Oftentimes firms will have a code of conduct, a set of guidelines for making ethical decisions. There are three ways to view such practices:
  • A negative view that believes that firms do not inherently want to be ethical, but are forced to appear so by social pressure
  • A positive view that believes that firms actually want to be morally good
  • An instrumental view that believes that firms can make money by being morally good
• The way in which firms respond to ethical challenges is often driven by certain norms. Four broad strategic responses are: (1) reactive, (2) defensive, (3) accommodative, and (4) proactive strategies.

How do firms leverage resources and capabilities? - CH. 4

• One way of looking at firms is the SWOT analysis, which is a tool for determining a firm’s strengths (S), weaknesses (W), opportunities (O), and threats (T). Whereas the institution-based view focuses on external O and T, the resource-based view focuses primarily on internal S and W.
• Resources and capabilities share the same definition, namely the tangible and intangible assets firms use to choose and implement its strategies, and the terms are used interchangeably throughout the book. As is clear from the definition, resources and capabilities are categorized into tangible resource and capability, assets that are observable and easily qualified, and intangible resource and capability, assets that are hard to observe and difficult (if not impossible) to quantify.
• In the process of production, there is often a chain of activities that create value. This is the value chain, a stream of activities from upstream to downstream that add value. Each activity requires resources and capabilities, so it is important to identify which firms are superior at which activities. This is where we use benchmarking in SWOT analysis, the process of examining whether a firm has resources and capabilities to perform a particular activity in a manner superior to competitors.
• We define outsourcing as turning over an activity to an outside supplier that will perform the activity on behalf of the focal firm. It is important to note that outsourcing is not the same as the following terms:
  • Offshoring, which is international/foreign outsourcing
  • Onshoring, which is domestic outsourcing
  • Captive sourcing, which is setting up subsidiaries abroad so that the work done is in-house but the location is foreign. Also known as foreign direct investment (FDI).
  • Domestic in-house activity, which is self-explanatory.
• The VRIO framework is the resource-based framework that focuses on the value (V), rarity (R), imitability (I), and organizational (L) aspects of resources and capabilities.

Why do we trade internationally? - CH. 5

• Trade means export, selling abroad, and import, buying from abroad. There are two main sectors in trade: merchandise (goods), tangible products being traded, and services, intangible services being traded. Nations trade because there is an economic advantage to be made. Both sides obviously have to benefit, otherwise one of the two sides will not trade.
• Three terms are very important in (measuring) trade: trade deficit, an economic condition in which a nation imports more than it exports, trade surplus, an economic condition in which a nation exports more than it imports, and balance of trade, the aggregation of importing and exporting hat leads to the country-level trade surplus or deficit.
• This book introduces six major theories on international trade:

1. Mercantilism
2. Absolute advantage
3. Comparative advantage
4. Product life cycle
5. Strategic trade
6. National competitive advantage

• There are two types of political barriers that hinder international trade: tariff barriers and nontariff barriers. A tariff barrier is a means of discouraging imports by placing a tariff (tax) on imported goods. Tariffs, however, are often criticized in the world, so governments resort to nontariff barriers (NTBs), trade barriers that rely on nontariff means to discourage imports, in trade wars. NTBs include (1) subsidies, (2) import quotas, (3) export restraints, (4) local content requirements, (5) administrative policies, and (6) antidumping duties.
• Two primary economic arguments against free trade: (1) the need to protect domestic industries and (2) the necessity to shield infant industries.
  There are four primary political arguments against free trade: (1) national security, (2) consumer protection, (3) foreign policy, and (4) environmental and social responsibility.

Why do firms engage in FDI? - CH. 6

• There are two most important ways of international investment: FDI and foreign portfolio investment (FPI), investment in a portfolio of foreign securities such as stocks and bonds. “Essentially, FPI is ‘foreign indirect investment’.”
• We can safely say that there are economic advantages to be gained from FDI. John Dunning has proposed that such gains come from ownership (O) advantages, location (L) advantages, and internalization (I) advantages; making OLI advantages (Dunning, 1993 Multinational Enterprises and the Global Economy, 207-219).
• In entering a foreign market, a firm has three choices: doing so through (1) exporting, (2) licensing, or (3) FDI. With (1) there is the problem that exporting can be stopped by protectionist policies, so the question quickly becomes: should firms opt for (2) or (3)?
• There are three reasons why firms prefer FDI over licensing.

1. FDI reduces dissemination risks.
2. FDI provides tight control over foreign operations.
3. FDI facilitates the transfer of tacit knowledge through “learning by doing.”

• Other than natural geographical advantages in location advantages, there is also the advantage of agglomeration, the clustering of economic activities in certain locations. Overall, agglomeration advantages come from:
  • Knowledge spillovers, knowledge diffused from one firm to others among closely located firms.
  • Industry demand that creates a skilled labor force.
  • Industry demand that facilitates a pool of specialized suppliers and buyers.
• Most rules and regulations are enforced by nation-states, so when firms engage in international business, these rules and regulations can fail. Since they are made to reduce uncertainty, failure can lead to more uncertainty, which causes higher transaction costs. If such costs are too high, firms will not want to participate in such a market, causing it to fail (market failure). Firms use internalization to combat such market failure.
• Apparently, more countries are seeing the benefits, but they still outweigh their options. In general, there are four benefits of FDI to host countries:
  1. Capital inflow
  2. Better technology because of technology spillovers, technology diffused from foreign firms to domestic firms. This is know as the demonstration effect, or the contagion (imitation) effect, the reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation.
  3. The gaining of advanced management know-how
  4. Job creation, both directly (MNEs employing local population) and indirectly (people spending more money).
• The primary costs are as follows:
  1. Loss of sovereignty: the owners of the MNE now make important economic decisions, such as those about investing and producing.
  2. Adverse effects on competition: the big MNEs drive local enterprises out of business.
  3. Capital outflow: the profits that the MNEs make is repatriated (sent back) to the headquarters in home countries.
• The benefits and costs of home countries are generally polar opposite to the host countries’ costs and benefits.

How do firms deal with foreign exchange rates? - CH. 7

• A foreign exchange rate is the price of one currency, such as the dollar, in terms of another, such as the euro. An appreciation is the increase in the value of the currency, depreciation is a loss in value of the currency.
• There are two most important exchange rate policies: a floating (flexible) exchange rate policy, a government policy to let supply-and-demand conditions determine exchange rates, and a fixed exchange rate policy, a government policy to set the exchange rate of a currency relative to other currencies.
• The Gold standard was a system in which the value of most major currencies was maintained by fixing their prices in terms of gold. Gold was the common denominator in this system, the currency or commodity to which the value of all currencies were pegged. This system was in place from 1870 to 1914.
• Near the end of WWII, an alliance of 44 countries agreed on a new system: the Bretton Woods system, a system in which all currencies were pegged at a fixed rate to the US dollar, named after the place where the agreement was made: Bretton Woods, New Hampshire, USA. Such a system made sense at a time when the US economy contributed 70% of global GDP and had huge exports at the end of WWII.
• We now live in the post-Bretton Woods system, a system of flexible exchange rate regimes with no official common denominator. Its strength is flexibility, its weakness uncertainty.
• Spot transactions are the classic single-shot exchange of one currency for another.
  Forward transactions are foreign exchange transactions in which participants buy and sell currencies now for future delivery.
• Currency swaps are foreign exchange transactions between two firms in which currencies are converted into another at Time 1, with an agreement to revert it to the original currency at a specified Time 2 in the future.
• Non-financial companies have to deal with currency risks, the potential for losses associated with fluctuations in the foreign exchange market. There are three major strategies: (1) invoicing in their own currencies, (2) currency hedging, and (3) strategic hedging. The easiest way of avoiding currency risks is by invoicing (NL: “factureren”) in one’s own currency. Currency hedging can be risky in itself, as companies can bet wrong. Strategic hedging is spreading out activities in a number of countries in different currency zones to offset any currency losses in one region through gains in other regions. This strategy is also known as currency diversification.

How can firms capitalize on global and regional integration? - CH. 8

• Theoretically, there are economic gains to be made from free trade, but many countries did not realize this until the end of WWII. After that, much of the global economic integration was aimed at the promotion of peace—the thought being that trading partners do not wage wars.
  • Promote peace by promoting trade and investment
  • Build confidence in a multilateral trading system
• The WTO has effective dispute resolution mechanisms which allow countries to handle disputes constructively, instead of having to wage (trade) war on another. Furthermore, the WTO system is a multilateral trading system, meaning that all participating countries have a say, which helps the principle of non-discrimination, a principle that a country cannot discriminate among its trading partners. Lastly, it is estimated that cutting all global trade barriers would raise the worldwide income by around 600 billion dollars, which could greatly help individuals too, as it would create more and better jobs.
• Critics, however, will argue that global economic integration has a terrible impact on the environment and that the fruits of the economic gains are distributed unfairly.
  • Disputes are handled constructively
  • Rules make life easier and discrimination impossible for all participating countries
  • Free trade and investment raise incomes and stimulate economic growth
• The WTO has six main areas:
  • An umbrella agreement, simply called the Agreement Establishing the WTO.
  • An agreement governing the international trade of goods, still using the old title as the GATT—technically, it is “GATT 1994.”
  • An agreement governing the international trade of services, the General Agreement on Trade in Services (GATS)
  • An agreement governing IP rights, the Trade-Related Aspects of Intellectual Property Rights (TRIPS)
  • Trade dispute settlement mechanism, which allow the WTO to adjudicate trade disputes among countries in a more effective and less time-consuming way.
  • Trade policy reviews, which enable other members to “peer review” a country’s trade policy.
• The EU has 28 member countries and is situated in Brussels, Belgium. It is an economic union, with most trade barriers removed. The borders have become the Schengen, a passport-free travel zone. There is a single currency, the euro, a currency used in 18 EU countries. These countries are called the euro zone.
• The adoption of the euro has been mostly successful. These are the costs and benefits:
  • Benefits:
    • Reduce currency conversions costs.
    • Facilitate direct price comparison.
    • Impose monetary discipline on governments.
• Overall, the euro has boosted intra-EU trade by about 10%.
  • Costs:
    • Unable to implement independent monetary policy.
    • Limit the flexibility in fiscal policy (in areas such as deficit spending).
• Risks are spread in the euro zone, but this comes at the risk of some countries becoming “free riders,” because they don’t have to fix their own fiscal problems.

How do entrepreneurial firms do business? - CH. 9

• Small and medium-sized enterprises (SMEs) are firms with fewer than 500 employees in the United States, or with fewer than 250 employees in the European Union.
• Firm size and age are not defining characteristics of entrepreneurship. It is defined as the identification and exploitation of previously unexplored opportunities. Entrepreneurs are the founders and/or owners of a new business or managers of existing firms, who identify and exploit new opportunities. International entrepreneurship is a combination of innovative, proactive, and risk-seeking behavior that crosses national borders and is intended to create wealth in organizations.
• The four major characteristics of a growing entrepreneurial firm are: (1) growth, (2) innovation, (3) financing, and (4) internationalization.
• Start-ups need money, but investing in them is a risk since a majority of start-ups fail. Actors who make such investments can be wealthy individuals; venture capitalists (VCs), investors who provide risk capital for early stage ventures; banks; foreign entrants; and government agencies.
• SMEs can enter foreign markets in three broad ways: (1) direct exports, (2) licensing/franchising, and (3) FDI.
  • Direct exports are the sales of products made by firms in their home country to customers in other countries. A transaction cost here can be that one has to trust the transporter. An idea to overcome this is the letter of credit (L/C), a financial contract that states that the importer’s bank will pay a specific sum of money to the exporter upon delivery of the merchandise.
  • Franchising is Firm A’s agreement to give Firm B the rights to use A’s proprietary assets for a royalty fee paid to A by B. This is typically done in service industries.
  • FDI may involve greenfield wholly owned subsidiaries, strategic alliances with foreign firms, and/or acquisitions of foreign firms. The advantage above licensing is that a firm can better control how its proprietary technology is used.
• The five main strategies are (1) export indirectly, (2) become suppliers for foreign firms, (3) become licensees or franchisees of foreign brands, (4) become alliance partners of foreign direct investors, or (5) harvest and exit through sell-offs.

Linkage refers to the ability to identify and bridge gaps.
Leverage refers to emerging multinationals’ ability to take advantage of their unique resources and capabilities, which are typically based on a deep understanding of customer needs and wants.
Learning refers to the willingness to learn, as opposed to thinking you already know everything.

How do firms enter foreign markets? - CH. 10

• The liability of foreignness is the disadvantage that foreign firms necessarily experience in a host country, simply because they are foreign. There are two aspects of this:
  • There is the fact that certain formal and informal institutions govern the rules of the game in different countries, which can be in favor of domestic firms.
  • Foreign firms are often discriminated against by customers
• There are four strategic goals for firms:
  • Natural resource-seeking firms. For instance, for oil, firms should enter Middle Eastern or the Russian market.
  • Market-seeking firms. For instance, entering the Chinese market may deliver many consumers.
  • Efficiency-seeking firms. For instance, entering a country with low wages.
  • Innovation-seeking firms. For instance, entering a market with agglomeration in the tech world (such as Silicon Valley).
• Cultural distance is the difference between two cultures along identifiable dimensions such as individualism. Institutional distance is the extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries.
• Not only location, but also timing matters in entering a foreign market. First-mover advantages are benefits that accrue to firms that enter the market first and that late entrants do not enjoy. For instance, Google has had such a huge advantage that the brand name has become a verb (to “google it”). Late-mover advantages, on the other hand, are benefits that accrue to firms that enter the market later and that early entrants do not enjoy.
• A mode of entry is the method used to enter a foreign market. There are generally two types: non-equity modes, modes of entry that reflects relatively smaller commitments to overseas markets. These modes can be divided into (1) exports and (2) contractual agreements. Type are equity modes, modes of entry that indicate a relatively larger, harder-to-reverse commitment. These types can also be divided into two categories: (3) partially owned subsidiaries and (4) wholly owned subsidiaries.

How do firms deal with global competitive dynamics? - CH. 11

• Adam Smith already wrote about collusion the collective attempt between competing firms to reduce competition. Cooperation and collusion are generally the same thing, though cooperation has a more positive connotation. Collusion can be tacit or explicit. Tacit collusion happens when firms indirectly coordinate actions by signaling their intention to reduce output and maintain pricing above competitive levels. Explicit collusion happens when firms directly negotiate output and pricing and divide markets. In such cases, a cartel (trust) is formed, an output-fixing and price-fixing entity involving multiple competitors. Trusts reduce competition, so many countries have developed antitrust laws, laws that make cartels (trusts) illegal.
• In domestic competition, formal institutions governing competition come from competition policy, government policy governing the rules of the game in competition. As we have seen earlier, one important aspect is antitrust policy, government policy designed to combat monopolies and cartels. Such policies can vary between countries. The US government thinks it is “fair” to promote entry to markets and “unfair” for large firms to raise entry barriers and to fix prices. In Japan, on the other hand, “fair” means that firms who have invested much time, energy, and resources in a certain industry deserve to be protected. So, in the US policies are pro-competition and pro-consumer, whereas in Japan they are pro-incumbent and pro-producer. Competition and antitrust policies focus mostly on (1) collusive price setting and (2) predatory pricing. Collusive price setting is price setting by monopolists or collusion parties at a level higher than the competitive level. Predatory pricing is an attempt to monopolize a market by setting prices below cost and intending to raise prices to cover losses in the long run after eliminating rivals.
• In international competition, formal institutions governing competition have to deal with dumping, an exporter selling goods below cost.
• An attack is an initial set of actions to gain competitive advantage. A counterattack is a set of actions in response to such an attack. Unopposed attacks are more likely to succeed, so when a firm attacks, they must be wary of three drivers for counterattacks: (1) awareness, (2) motivation, and (3) capability.
• Depending on (1) industry pressures to globalize and (2) the nature of competitive assets, local firms can opt for four strategies in competing with MNEs:
  • When a local firm has assets that are customized to home markets and is in an industry with a low pressure to globalize, it can opt for a defender strategy, a strategy that centers on local assets in areas in which MNEs are weak.
  • When a local firm has assets that are transferable abroad and is in an industry with a low pressure to globalize, they can opt for an extender strategy, a strategy that centers on leveraging homegrown competencies abroad.
  • When a local firm has assets that are customized to home markets and is in an industry with a high pressure to globalize, it can opt for a dodger strategy, a strategy that centers on cooperating through joint ventures with MNEs and sell-offs to MNEs.
  • When a local firm has assets that are transferable abroad and is in an industry with a high pressure to globalize, it can opt for a contender strategy, a strategy that centers on a firm engaging in rapid learning and then expand overseas.

How do firms make alliances and acquisitions work? CH. 12

• Strategic alliances are voluntary agreements of cooperation between firms. Contractual (non-equity-based) alliances are alliances between firms that are based on contracts and do not involve the sharing of ownership. Examples are co-marketing and R&D contracts. Equity-based alliances are alliances based on ownership or financial interest between the firms. These include strategic investment, one firm investing in another as a strategic advisor, and cross-shareholding, where both firms investing in each other become cross-shareholders. A joint-venture (JV) is also an example of an equity-based alliance. An acquisition is a transfer of the control of operations and management from one firm (target) to another (acquirer), the former becoming a unit of the latter. A merger, on the other hand, is a combination of operations and management of two firms to establish a new legal entity.
• Formal institutions affect alliances and acquisitions along two dimensions: (1) antitrust concerns and (2) entry mode requirements. Antitrust regulations are more likely to allow alliances than acquisitions, because acquisitions actually eliminate a competitor and alliances do not. Formal market entry requirements can also dissuade firms from acquisitions, thereby leaving alliances open as the only option. Recently, however, a trend has been established toward more liberal policies on such entry mode requirements—which has led to a decline in JVs and an increase in the number of acquisitions in emerging economies. However, many countries still impose entry requirements to protect domestic firms from becoming foreign assets.
• Resources and capabilities also influence alliances, according to the VRIO analysis:
  • Value must be created in order for an alliance or acquisition to make sense. There are three mains ways for this:
    • Reducing costs, risks, and uncertainties
    • Accessing complementary assets and learning opportunities
    • Possibilities to use alliances as real options, investments in real operations as opposed to financial capital (two steps are involved in this: (1) first, an investor makes a relatively small investment to buy an option, which leads to the right to make a future investment without being obligated to do so and (2) after that, the investor holds the option until a decision point arrives in the second phase, and then decides between exercising the option or abandoning it).

However, there can also be disadvantages:

• • • Choosing the wrong partners
    • Partners’ possible opportunism
    • The risk of helping to nurture competitors (learning race, in which partners aim to outrun each other by learning the “tricks” from the other side as fast as possible)
  • Rarity: relational (collaborative) capabilities are the ability to manage interfirm relationships. These can be rare, as most managers are educated in competition instead of collaboration.
  • Imitability: there are two levels to this:
    • The firm level: A firm’s capabilities might be imitated by other firms.
    • The alliance level: a specific alliance between firms can be hard to imitate. What is it, exactly, that makes a specific relationship work and how do you copy that?

• • Organization: When individuals have such a hard time keeping up relationships (50% of all marriages fail), it is no wonder that large organizations have issues as well
• In stage two, there are four driving forces in choosing between a contract- or equity-based approach.
  • Nature of shared resources and capabilities (degree of tacitness (hard to describe and codify or not?))
    • For equity-based alliances: high
    • For non-equity-based alliances: low
  • Importance of direct organizational monitoring and control
    • For equity-based alliances: high
    • For non-equity-based alliances: low
  • Potential as real options
    • For equity-based alliances: high (possible upgrade to M&As)
    • For non-equity-based alliances: high (for possible upgrading to equity-based relationships
  • Influence of formal institutions
    • For equity-based alliances: high (when required or encouraged by regulations)
    • For non-equity-based alliances: high (when required or encouraged by regulations)
• Alliances are often described as marriages. So what happens when firms go from marriage to divorce? It starts with the “initiation” of one of the partners, showing their discontent. When that is not picked up or fixed, the problem can escalate. One example of this is a firm going public with its problems in the alliance, to win public sympathy. After this comes the uncoupling phase, which can be friendly or hostile. Finally, in the aftermath phase, oftentimes “divorced” firms will try to look for a new partner.
• There are three potential motives for acquisition: (1) synergistic, (2) hubristic, and (3) managerial. Synergistic motives add value, but hubristic and managerial motives—in theory—reduce value. Hubris is the overconfidence in one’s capabilities. Managerial motives are managers’ desire for power prestige, and money, which may lead to decisions that do not benefit the firm overall in the long run.

What is the importance of multinational strategy, structure, and learning? - CH. 13

• MNEs confront two sorts of pressures: cost reduction and local responsiveness. The integration-responsiveness framework is a framework for managers to deal with both pressure simultaneously. Cost pressure often call for global integration, while local responsiveness, the necessity to be responsive to different customer preferences around the world, pushes MNEs to adapt locally. It is difficult to do both at the same time. Even though global consumer taste is converging, many experiments to integrate a product globally with the least possible adaptations locally have failed. There are four strategic choices to succeed in this dilemma, based on the integration-responsiveness framework: (1) home replication, (2) localization, (3) global standardization, and (4) transnational. There are advantages and disadvantages to each of these.
• There are four organizational structures that fit with the above mentioned strategies: (1) international division, (2) geographic area, (3) global product division, and (4) global matrix.
• Knowledge management refers to the structures, processes, and systems that actively develop, leverage, and transfer knowledge. Knowledge management is highly associated with information management, and thus with IT, but it entails more than that. There is explicit knowledge, knowledge that is codifiable (can be written down and transferred with little loss of richness) and tacit knowledge, knowledge that is non-codifiable, whose acquisition and transfer require hands-on practice.
• See the table on knowledge management.
• In response to such problems, MNEs have come up with a new model, open innovation, the use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation. Knowledge management is best facilitated by informal social capital, the informal benefits individuals and organizations derive from their social structures and networks. The micro informal interpersonal relationships among managers of various units may greatly facilitate macro intersubsidairy cooperation among various units—a micro-macro link.

How do firms market their products and keep up their supply chain effectively? - CH. 14

• Marketing refers to the efforts to create, develop, and defend markets that satisfy the needs and want of individual and business customers. A supply chain is the flow of products, services, finances, and information that passes through a set of entities from a source to the customer. Supply chain management, then, refers to the activities to plan, organize, lead, and control the supply chain. Marketing and the supply chain should be viewed not as separate functions, but as one integrated function.
• Product is the offering that customers purchase. One important concern for MNEs concerning products is whether they should standardize them, or localize them (so, adapt a product to a new place or not). In a global perspective, there are four primary categories: global citizens (who favor global brands with prestige), global dreamers (who cannot afford, but admire global brands), anti-globals (who are most likely to lead anti-globalization demonstrations), and global agnostics (who are skeptical about whether global brands deliver higher-quality goods).
• Price is the expenditures that customers are willing to pay for a product. This changes over time, which leads to a change in demand. That is called price elasticity. With most products demand will go up as prices go down, but the more interesting question is how much? Another dimension of price is the total cost of ownership, the total cost needed to own a product, consisting of initial purchase cost and follow-up maintenance/service cost.
• Promotion is defined as the communications that marketers insert into the marketplace. It includes all advertising, personal selling, and public relations. With promotion, too, there is the choice of whether to standardize or localize. Another challenge lies in whether to promote online or offline.
• Place refers to the location where products and services are provided (including the online marketplace, of course). Place is also often referred to as the distribution channel, the set of firms that facilitates the movement of goods from producers to consumers. This has become increasingly since the 1980s, as most companies no longer produce in-house, but outsource this work. This more complex process is now referred to as the “supply chain.”
• Agility is the ability to react quickly to unexpected shifts in supply and demand.
• Adaptability is the ability to change supply chain configurations in response to longer-term changes in the environment and technology. Enhancing adaptability often involves making a series of make-or-buy-decisions, decisions about whether to produce inhouse (“make”) or to outsource (“buy”).
• Alignment refers to the alignment of interests of various players in the supply chain. To be sure, every supply chain is sort of a strategic alliance involving various players, all of which wanting to maximize profit. This can lead to conflict—alignment is meant to overcome/prevent such conflict.

How do firms manage human resources? - CH. 15

• Staffing refers to HRM activities associated with hiring employees and filling positions. There are two types of employees in MNEs: (1) Host-country nationals (HCNs), individuals from the host country who work for an MNE, and (2) expats. Within expats, there are two categories: (2a) parent-country nationals (PCNs), individuals who come from the parent country of the MNE and work at its local subsidiary, and third-country nationals (TNCs), individuals who are from neither the parent country nor the host country of the MNE. Most MNE employees are HCNs.
• There are three strategies for staffing: ethnocentric, polycentric, and geocentric.
• Expatriation is the process of selecting, managing, and motivating expatriates to work abroad. Generally speaking, expatriates have four roles: (1) strategist (long-term workers), (2) daily manager (running operations), (3) ambassador (representing the headquarters with subsidiaries, and representing subsidiaries with headquarters), (4) trainer.
• Training is specific preparation to do a particular job. Development is the long-term, broader preparation to improve managerial skills for a better career.
• Compensation is the determination of salary and benefits. Performance appraisal is the evaluation of employee performance for promotion, retention, or termination purposes. There are two major approaches to expat compensation: (1) going rate and (2) balance sheet.
• Labor relations are a firm’s relations with organized labor (unions) in both home and host countries. Firms want to keep costs down, whereas union want increased wages. In the US, unionized workers earn 30% more than non-unionized workers. Naturally, conflict arises between firms and unions. Unions can threaten to strike to get their way, but managers can threaten to take jobs overseas.

How do firms finance and govern the corporation globally? - CH. 16

• Financing is the management of a firm’s money, banking, investments, and credit. Corporate governance is the relationship among various participants in determining the direction and performance of corporations. Those participants are (1) owners, (2) managers, and (3) boards of directors—the “tripod.”
• Equity is the stock in a firm (usually expressed in shares), which represents the owners’ rights. These owners are called shareholders. Shareholders purchase stock for dividends and the stock’s potential growth. Debt is a loan that the firm needs to pay back at a given time with an interest. The loan is called a bond, which is held by bondholders. Management has little to say about bonds—they just have to pay them back in time. If not, the firm will be in default, a failure to satisfy the terms of a loan obligation.
• Financing decisions are primarily driven by the cost of capital, the rate of return that a firm needs to pay to capital providers. For equity, that is dividend. For bonds, it is the interest. Supply and demand make sure that the larger the pool of capital providers, the lower the cost of capital. Many firms list their stocks globally, not just domestically. Listing shares on a foreign stock exchange is called cross-listing.
• Broadly speaking, there are three patterns of ownership: (1) concentrated versus diffused ownership, (2) family ownership, and (3) state ownership.
• The relationship between shareholders and professional managers is a relationship between principals and agents, an agency relationship. Principals are individuals (such as owners) delegating authority. Agents are individuals (such as managers) to whom authority is delegated. Agency theory is a theory that focuses on principal-agent relationships (or in short, agency relationships). Out of this theory comes the insight that when the interests of principles and agents are not aligned, principal-agent conflict will exist. Such conflict leads to agency costs, such as (1) the principals’ costs of monitoring and controlling the agents and (2) the agents’ costs of bonding (signaling their trustworthiness).
• There can also be principal-principal conflicts, conflicts between two classes of principals: controlling shareholders and minority shareholders.
• The board of directors acts as an intermediary between managers and owners. Inside directors are members of the board who are top executives at the firm. The current trend is to introduce more outside (or independent) directors, non-management member of the board. Even though this trend currently exists, there is no academic argument for it.
• There are internal and external governance mechanisms, also known as voice-based and exit-based. Voice-based mechanisms are corporate governance mechanisms that focus on shareholders’ willingness to work with managers, usually through the board, by “voicing” their concerns. Exit-based mechanisms are corporate governance mechanisms that focus on exit, indicating that shareholders no longer have patience and are willing to “exit” by selling their shares.

How do firms manage corporate social responsibility globally? - CH. 17

• This chapter focuses on corporate social responsibility (CSR), the consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks. Central to this concept is the stakeholder, any group or individual who can affect or is affected by the achievement of the organization’s objectives.
• One key goal for CSR is global sustainability, the ability to meet the needs of the present without compromising the ability of future generations to meet their needs around the world. There are three main sets of drivers here: population increase, poverty, and inequality; NGOs and other civil society stakeholders; and environmental effects such as global warming.
• Primary stakeholder groups are constituents on which the firm relies for its continuous survival and prosperity: shareholders, managers, employees, suppliers, etc. Secondary stakeholder groups are those who influence or affect, or are influenced or affected by, the firm but are not engaged in transactions with the firm and are not essential for its survival: environmental groups, fair labor practice groups, etc.
• Generally speaking, firms have four ways of responding to pressures from formal and informal institutions: (1) reactive, (2) defensive, (3) accommodative, and (4) proactive. An example from the US chemical industry in response to environmental pressures.

Global Business - Peng - ExamTickets

How should we look at global business? - CH. 1

• International business is not the same as global business (because global business also includes domestic business!)
• Fundamental question: what determines the success and failure of firms around the globe?
• Two fundamental perspectives: institutionbased view and resource-based view.
• Globalization works like a swing of a pendulum.

How do we understand formal institutions: politics, laws, and economics? - CH. 2

• Institutions are defined as the rules of the game and the reduce uncertainty.
• Two propositions of the institutionbased view: 1) managers and firms rationally pursue their interest and make choices within formal and informal institutional constraints in a given institutional framework and 2) when formal constraints are unclear or fail, informal constraints will play a larger role.
• Theoretically there are pure market economies and pure command economies, but, in reality, most countries are a mix (though increasingly toward the pure market economy).

How do informal institutions govern individual and firm behavior in different countries? - CH. 3

• The four major components of culture are language, religion, social structure, and education.
• The dimension approach to cultural differences is most influential, and it has five dimensions: power distance, individualism/collectivism, masculinity/femininity, uncertainty avoidance, and longterm orientation.
• When confronting ethical challenges, individual firms have four strategic choices: reactive, defensive, accommodative, and proactive strategies.

How do firms leverage resources and capabilities? - CH. 4

• Resources and capabilities are used interchangeably and refer to tangible and intangible assets a firm uses.
• The VRIO framework refers to: value, rarity, inimitability, and organizationally embedded.

Why do we trade internationally? - CH. 5

• The classical theories of trade are: mercantilism, absolute advantage, and comparative advantage.
• The modern theories of trade are: product life cycles, strategic trade, and diamond.
• Economic arguments against free trade center on protectionism and infant industries
• Political arguments against free trade center on national security, consumer protection, foreign policy, and environmental and social responsibility.

Why do firms engage in FDI? - CH. 6

• The resourcebased view explains FDI through the D (direct) because firms want to have direct control over resources. The institution-based view explains the recent increase in FDI by friendlier government policies.
• The direct control associated with FDI results in OLI advantages: ownership, location, and internalization.
• The radical view thinks very negatively of FDI and warns about exploitation in—especially—emerging economies.
• FDI brings several costs and benefits for home and host countries.

How do firms deal with foreign exchange rates? - CH. 7

• The most important determinants of foreign exchanges rates are: relative price differences and PPP, interest rates, productivity and balance of payments, exchange rate policies, and investor psychology.
• The international monetary system went from the Gold Standard (18701914) to the Bretton Woods system (1944-1973) to the current system, called the Post-Bretton Woods system (1973-present).
• Three foreign exchange transactions are: sport transactions, forward transactions, and swaps.

How can firms capitalize on global and regional integration? - CH. 8

• The GATT (19481994) significantly reduced tariff rates on merchandise trade.
• The WTO (1995present) was set up not only to incorporate the GATT, but also to cover trade in services, intellectual property, trade dispute settlement, and peer review of trade policy.
• Global economic integration has great benefits, both politically and economically, but there are also important challenges (such as internal divisions in Europe).

How do entrepreneurial firms do business? - CH. 9

• Entrepreneurship is the identification and exploitation of previously unexplored opportunities.
• Institutions enable and constrain entrepreneurship around the world, but success or failure is largely determined by firmspecific resources and capabilities.
• Entrepreneurial firms can internationalize through direct exports, licensing/franchising, and FDI.
• They can also internationalize without venturing abroad by exporting indirectly, supplying foreign firms, becoming licensees/franchisees of foreign firms, joining foreign entrants as alliance partners, and harvesting and exiting through selloffs to foreign entrants.

How do firms enter foreign markets? - CH. 10

• Firms can attempt to overcome the liability of foreignness they experience when entering a foreign market by minding their strategic goals, such as seeking natural resources, market, efficiency, and innovation.
• Firms can decide when to enter (first or late) and how to enter (largescale or small-scale).

How do firms deal with global competitive dynamics? - CH. 11

• Industries where there is much cooperation and collusion generally have a small number of rivals, a price leader, homogenous products, high entry barriers, and high market commonality.
• Domestically, governments impose antitrust laws to fight collusion. Internationally, there are antidumping laws.
• Successful counterattacks are based on awareness, motivation, and capability. Prevention of attacks, however, takes place through signaling.
• When confronting MNEs, local firms can choose the following strategic choices: defender, extender, dodger, or contender.

How do firms make alliances and acquisitions work? - CH. 12

• An alliance is a voluntary agreement of cooperation and an acquisition is a transfer of management from one firm to another.
• Alliances are formed when managers go through a threestage decisions process. Acquisitions are often driven by synergistic, hubristic, and managerial motives.

What is the importance of multinational strategy, structure, and learning? - CH. 13

• There are four strategy/structure pairs: home replication strategy/international division structure, localization strategy/geographic area structure, global standardization strategy/global product division structure, and transnational strategy/global matrix structure.
• Tacit knowledge is most important in knowledge management.

How do firms market their products and keep up their supply chain effectively? - CH. 14

• The four Ps in marketing are product (standardization versus localization), price (elasticity), promotion (enhance or downplay the countryof-origin effect), and place (supply chain management).
• Agility, adaptability, and alignment are the triple As in supply chain management.

How do firms manage human resources? - CH. 15

• In international staffing there are HCNs, PCNs, and TCNs, and three approaches: ethnocentric, polycentric, and geocentric.
• Expatriates can be significantly helped in their abroad mission through training.
• Human resources unionize. Unions have been declining, but firms still have to find agreements with them.

How do firms finance and govern the corporation globally? - CH. 16

• Equity and debt are the two primary means of financing decision. Tapping into larger pools of capital lowers the cost of capital.
• Ownership differs around the world.
• Conflict can occur within corporations: between ownership and management (principalagent conflict) and between majority and minority shareholders (principal-principal conflict).
• Two forms of governance mechanisms: voicebased and exit-based. They can combine.

How do firms manage corporate social responsibility globally? - CH. 17

• A stakeholder view of the firm advocates a broader view of company goals: not just profit maximization (economic performance), but also social and environmental performance.
• The institutionbased view offers four ways of reacting to CSR pressures: reactive defensive, accommodative, and proactive.