Managing across borders(How firms overcome their liability of foreignness)

Chapter 7

• Important insights from international management (IM)• Difference in focus between international business and

international management– International business: Study of firms crossing national borders

(incl. cross-border activities of businesses, interactions with the international environment, and comparative studies of business as an organizational form in different countries).

– International management: Study of the process of planning, organizing, directing, and controlling the organization. Hence, the importance of firm specific advantages.

• Key question: How can firms organize their foreign activities in the most effective and efficient way so that there is positive reinforcement between such activities and their firm-specific advantages?

Firm specific advantages• Derived from the resource-based view (RBV) of the firm

which argues that ‘a firm’s competitive advantage is the result of the application of a bundle of valuable resources.’

• In RBV, resources and capabilities make up the firm-specific advantages.

• Resource is part of a firm-specific advantages if it is(i) valuable

(ii) rare

(iii) inimitable

(iv) non-substitutable

• Resources are necessary but not sufficient condition for firm-specific advantage. They need to be complemented by capabilities.

• One of the most important capabilities of firms is dynamic entrepreneurial ability.

• Firm-specific advantages can be derived from various sources (e.g., marketing and/or proprietary knowledge.) See Table 7.1

Table 7.1: Brand name and technology as firm-specific advantages

Reputation as a resource Technology as a resource Top 20 Most valuable global brand name Top 20 Patents per company 1 2 3 4 5

Apple IBM Google McDonald’s Microsoft

Technology Technology Technology Fast food Technology

IBM Samsung Microsoft Hitachi Canon

5,866 4,518 3,121 2,852 2,656

6 7 8 9 10

Coca-Cola Marlboro AT&T Verizon China Mobile

Soft drinks Tobacco Telecoms Telecoms Telecoms

Panasonic Toshiba Sony Siemens Intel

2,536 2,212 2,130 1,743 1,652

11 12 13 14 15

General Electric Vodafone ICBC Wells Fargo VISA

Conglomerate Telecoms Financial Financial Financial

Fujitsu Hewlett-Packard General Electric LG electronics Seiko-Epson

1,646 1,596 1,516 1,488 1,438

16 17 18 19 20

UPS Walmart Amazon Facebook Deutsche Telekom

Logistics Retail Retail Technology Telecoms

NEC Oracle Ricoh Cisco Honeywell

1,283 1,222 1,198 1,114 1,074

Source: patents per company: US Patent and Trademark Office (www.ipo.org); brand name ranking: MillwardBrown, a global marketing consultancy firm (www.millwardbrown.com).

Multi-locational or multinationalHow are firm-specific advantages related to

internationalizing firms? (Table 7.2)

Table 7.2 Multinationals as a special case of the multi-locational firm

Number of countries Number of locations

Single Multiple

Single Domestic firm Multi-locational domestic firm

Multiple - Multinational firm

Managing the global-local paradox

• Tensions between the pressure to be cost effective and standardizing within the firm (global integration) and the pressure to be locally responsive (localization).

• Table 7.3

Table 7.3 Integration-responsiveness framework

Pressure for global integration

Pressure for local responsiveness Low High

High Global standardization strategy

Transnational strategy

Low International strategy Localization (multi-domestic strategy)

Source: based on Bartlett and Ghoshal (1989)

Subsidiary resources

Cannot be transferred(location bound)

Can be transferred(not location bound)

Part of multinational’s firm-specific advantage

yes

yes

yes

no

no

no

Superior to elsewherein multinational?

Recognized by the multinational?

Effectively used by the multinational?

Figure 7.1 Transferring subsidiary resources to the multinational (under transnational strategy)

Source: adapted from Birkinshaw et al (1998)

Three examples of the global-local challenge

1. International marketing

2. Corporate social and environmental responsibility

3. Human resource management

Table 7.4 International cultural diversity in four dimensions (index scores)

highest three Mexico 81 Belgium 94 USA 91 Japan 95 India 77 Japan 92 Australia 90 Austria 79

Singapore 74 :

France 86 :

UK 89 :

Italy 70 :

power distance uncertainty avoidance individualism masculinity :

Denmark 18 :

Greece 11 :

Singapore 20 :

Netherlands 15 Israel 13 Portugal 10 S. Korea 18 Norway 8

Austria 11 Singapore 8 Pakistan 14 Sweden 5 lowest three

Source: Hofstede (2001); ranking for a subset of 30 countries: Argentina, Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, India, Ireland, Israel, Italy, Japan, Mexico, Netherlands, New Zealand, Norway, Pakistan, Portugal, Singapore, S. Korea, Spain, Sweden, Switzerland, UK, and USA.

Figure 7.2 Correlation in cultural characteristics

Cultural characteristics

0

20

40

60

80

100

0 20 40 60 80 100power distance

indi

vidu

alis

m

Mexico

Denmark

USA

Japan

trendline

Data source: Hofstede (2003); the 30 countries listed in Table 7.4 are depicted.

Figure 7.3 Increase in taxes if used to prevent environmental pollution

Entry modes

• Licensing

• Franchising

• Greenfield

• Acquisition

• Joint venture

Table 7.7: Nature, motives, strategies and modes of international business activity

Nature of activity (chapter 2)

Motives (chapter 6)

Strategies (this chapter)

Modes (this chapter)

Trade (export / import)

Multinational (horizontal / vertical)

Market seeking

Efficiency seeking

Natural resource seeking

Strategic asset seeking

International global standardization

Localization / multidomestic transnational

Exporting

Licensing

Franchising

Greenfield

Acquisition

Joint venture

Figure 7.4 Acquisition waves 1895-2012

Source: updated figure provided by McCarthy (2011, p.16).

Choosing optimal entry mode

• Main factors– Degree of control– Level of resource commitment– Dissemination risk

• Internationalization patterns over time

• Box 7.5: IKEA’s internationalization over time

Figure 7.5 Distance distribution of IKEA’s first stores over time, 1963-2011European countries (square) and other countries (circle

a. IKEA first stores, geographic distance to Almhult, Sweden

4

5

6

7

8

9

10

1960 1970 1980 1990 2000 2010year

ln(d

ista

nce)

regression line European countries

regression line other countries

Norway

Denmark

worldwide average distance to Sweden

AustraliaJapan

Data sources: www.ikea.com for first stores, www.distance-calculator.co.uk for distances from Almhult to first store locations, and www.cepii.fr for worldwide average distance to Sweden. Regression lines for European countries significant, for other countries not significant; overall regression significant for cultural distance, not for geographic distance. Average distance from Sweden to 224 other countries is 6826 km; average distance from Almhult to first stores is 3763 km

Figure 7.5 Distance distribution of IKEA’s first stores over time, 1963-2011European countries (square) and other countries (circle

Data sources: www.ikea.com for first stores, www.distance-calculator.co.uk for distances from Almhult to first store locations, and www.cepii.fr for worldwide average distance to Sweden. Regression lines for European countries significant, for other countries not significant; overall regression significant for cultural distance, not for geographic distance. Average distance from Sweden to 224 other countries is 6826 km; average distance from Almhult to first stores is 3763 km

b. IKEA first stores, cultural distance to Sweden

0

3

6

9

1960 1970 1980 1990 2000 2010year

cultu

ral d

ista

nce

Norway Denmark

Australia

regression line other countries

regression line European countries

Japan