Chapter 1 expanding abroad: motivations, means and mentalitiesThe MNE definition, scope, and influenceMNE have substantial direct investment in foreign countries (not just the trading relationships of an import-export business), and are engaged in the active management of these offshore assets rather than simply holding them in a passive investment portfolio creates an internal organization to carry out key cross-border tasks and transactions internally, rather than depending on trade through the external marketsEnormous influence in the global economy

The motivations: pushes and pulls to internationalizeTraditional motivations- the need to secure key supplies- market-seeking behavior when companies have a competitive advantage in offshore markets

through some intrinsic advantage, related to a company’s technology or brand recognition, or through economies of scale and scope

- the desire to access low-cost factors of production (labor, lower-cost capital)Product cycle theory (most useful before 1980’s) three stages in the internationalization process:

- starting point: an innovation that a company creates in its home country and export to similar markets (through an export unit within the home office) production close to customer base, and close linkage between research and production

- growing demand in the export markets set up production facilities in the importing countries transition to MNE

- product becomes standardized more competitors move production to low-wage developing countries because of resource-seeking motive. Developing countries become exporter, developed countries become importers

Emerging motivations- increasing scale economies, ballooning R&D investments, and shortening product life cycles

transformed industries into global rather than national structures worldwide scope is prerequisite for survival of companies

- global scanning and learning capability a company whose international strategy was triggered by a technological or marketing advantage could enhance that advantage through the scanning and learning potential inherent in its worldwide network of operations

- advantages of competitive positioning cross-subsidization of markets use leverage of successful investments in countries to support less successful investments

The means of internationalization: prerequisites and processesPrerequisites for internationalization- motivation: there must be foreign countries that offer certain location-specific advantages- strategic competencies: having some distinctive competency to overcome the liability of foreignness

- organizational capabilities: having the organizational capability to leverage its strategic assets more effectively through its own subsidiaries than through contractual relations with outside parties

The process of internationalizationForeign-market entry is a learning process through several cycles of investment, the company

develops the necessary levels of local capability and market knowledgeOthers invest in or acquire local partners to shortcut the process of building up local market knowledge, or some are ‘born globals’ establish significant international operations at or near their founding Important factors: assimilation of local market knowledge, overall level of commitment, the required

level of control of foreign operations, and the timing of entryDifferent modes of operating oversees in terms of market commitment and the level of control

indirect export > export > licensing > franchising > joint venture > wholly owned subsidiary

The evolving mentality: international to transnationalFour stages that reflect the way in which management thinking has develop over time as changes have occurred in both the international business environment and the MNE as a unique corporate form:International mentalityDomestic with some foreign appendages products are developed for the domestic markets and

exported distant outposts which support the domestic parent company (for example with incremental sales)

Multinational mentalityMultiple, nationally responsive strategies of the company’s worldwide subsidiariesrecognize and emphasize the differences among national markets and operating environments more

flexible modify products, strategies and management practices for every countryglobal mentalitycreate products for a world market and manufacturing them on a global scale in a few highly efficient

plants national tastes and preferences are more similar than differenttransnational mentalitymore responsive to local needs while capturing the benefits of global efficiency resources and

activities are dispersed but specialized, to achieve efficiency and flexibility at the same time, and integrated into an interdependent network of worldwide operations

administrative heritage: the unique and deeply embedded structural, process and cultural biases that play an important part in shaping every company’s strategic and organizational capabilities

reading 1-2 distance still matters: the hard reality of global expansionmanagers routinely overestimate the attractiveness of foreign markets, dazzled by the sheer size of untapped markets, they lose sight of the difficulties of pioneering new, often very different territories.analytical tools underestimate the costs, and focus too much on potential salesopportunities in foreign markets should be evaluated by the different dimensions of distance

Four dimensions of distance

Cultural distanceDetermine how people interact with one another and with companies and institution differences in cultural attributes like religious beliefs, race, social norms, language etc create distance (visible), but also social norms: deeply rooted system of unspoken principles that guide individuals in their everyday choices and interactions (nearly invisible)Cultural attributes influence consumer preferencesAdministrative or political distanceHistorical and political associations shared by countries greatly affect trade between them preferential trading arrangements, common currency, and political union increase trade. Unilateral measures of the domestic as well as the target country’s government raise barriers (tariffs, quotas, restrictions)Measures to protect the domestic industries are used when it’s a large employer, a national champion,

vital to national security, produces staples (hoofdproduct, like food), produces an ‘entitlement’ good or service (basic human right), exploits natural resources, or involves high sunk-cost commitments

Geographic distanceThe further away, the harder to conduct businessOther attributes: physical size, average within-country distances to borders, access to waterways and the

ocean, and topography, but also transportation and communication infrastructuresCompanies that find geography a barrier to trade often switch to direct investment to access target markets Economic distanceWealth or income rich countries engage in relatively more cross-border economic activityCompanies that rely on economies of experience, scale and standardization focus on countries with

similar economic profilesCompanies that rely on economic arbitrage (exploitation between cost and price differences between

markets) target countries with different economic profiles

A case study in distanceOnce distance is taken into account, the size of the market opportunity looks very differentNot only industry effects of distance should be taken into account, but also a company’s own

characteristics