Chapter 8 – Global StrategyThe use of international strategies are increasing, Multiple factors and conditions are influencing the increasing use of these strategies, including opportunities to Extend a product’s life cycle Gain access to critical raw materials, sometimes including relatively inexpensive labor Integrate a firm’s operations on global scale to better serve customers in different countries Better serve customers whose needs appear to be more alike today as a result of global

communications’ media and the Internet’s capabilities to inform Meet increasing demand for goods and services that is surfacing in emerging marketsWhen used effectively, international strategies yield four primary benefits. Firms use

international business-level (follows generic strategies of cost-leadership, differentiation, focused or broad) and international corporate-level strategies to geographically diversify their operations (home country usually most important source of competitive advantages). International business-level strategies are usually grounded in one or more home-country advantages. Research suggests that there are four determinants of national advantage (figure on right). There are three types of international corporate-level strategies. A multi-domestic strategies focus on competition within each country in which the firm competes. Firms using a multi-domestic strategies decentralize strategic and operating decisions to the business units operating in each country, so that each unit can tailor its products to local conditions. A global strategy assumes more standardization of products across country boundaries; therefore, a competitive strategy is centralized and controlled by the home office. Commonly, large multinational firms, particularly those with multiple diverse products being sold in many different markets, use a multi-domestic strategy with some product lines and a global strategy with others. A transnational strategy seeks to integrate characteristics of both multi-domestic and global strategies for the purpose of being able to simultaneously emphasize local responsiveness and global integration.

Two global environmental trends liability of foreignness and regionalization- are influencing firms’ choices of international strategies as well as their implementation. Liability of

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foreignness challenges firms to recognize that four types of distance between their domestic market and international markets affect how they compete. Some firms choose to concentrate their international strategies on regions rather than on individual country markets.Firms can use one or more of five entry modes to enter international markets. Most firms begin with exporting or licensing, because of their lower costs and risks, but later they might use strategic alliances and acquisitions as well. The most expensive and risky means of entering a new international market is establishing a new wholly owned subsidiary. On the other hand, such subsidiaries provide the advantages of maximum control by the firm and, if successful, the greatest returns.

Firms encounter a number of risks when implementing international strategies. The two major categories of risks firms need to understand and address when diversifying geographically through international strategies are political risks and economic risks.Successful use of international strategies contributes to a firm’s strategic competitiveness in the form of improved performance and enhanced innovation. International diversification facilitates innovation in a firm because it provides a larger market to gain greater and faster returns from investments in innovation. In additions, international diversification may generate the resources necessary to sustain a large-scale R&D program.

In general, international diversification is related to above-average returns, but this assumes that the diversification is effectively implemented and that the firm’s international operations are well managed. International diversification provides greater economies of scope and learning which, along with greater innovation, help produce above-average returns. Several issues or conditions affect a firm’s use of international strategies to pursue strategic competitiveness. Some limits also constrain the ability to manage international expansion effectively. International diversification increases coordination and distribution costs, and management problems are exacerbated by geographic dispersion, trade barriers, logistical costs, and cultural diversity, other differences by country and relationship between organization and host country. There are two risks in international environment.Political risks Government instability Conflict or war Government regulations Conflicting and diverse legal authorities Potential nationalization of private assets Government corruption

Changes in government policies Economic risks Differences and fluctuations in currency

values Investment losses due to political risks

Case: The International Competitiveness of Asian Firms

What is the international competitiveness of the largest Asian firms? How do these Asian firms develop their country specific advantages (CSAs) and firms specific advantages (FSAs)?

In his book, The Competitive Advantage of Nations, Porter used country level data on industry export market shares, where a competitive industry is defined as one which has a greater share of the world market in that industry than the overall average world share of that country's

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exports. Subsequent work on international competitiveness has also used country level data but has moved beyond trade data to include shares of foreign direct investment (FDI) (Dunning, 1993). Furthermore, the original Porter diamond framework which included factor conditions, demand conditions, domestic rivalry, and the related and supporting (mostly service) industries in an interdependent system (where these four determinants was also affected by the role of government and chance). This framework has been upgraded to include more details of the domestic aspects of competitiveness, including the business context and the labor market for skilled and unskilled workers (Cho and Moon, 1998,2000). As discussed in the next section, Rugman and D'Ci-uz (1993) and Moon et al. (1998) and others have advanced on the Porter single diamond framework by introducing and testing a double diamond framework. While the Porter single diamond works reasonably well to explain the competitiveness of large countries like the USA and Japan, the double diamond framework is necessary to analyze the competitiveness of smaller countries such as Canada, Korea, Australia, etc.

Findingsa. Asian firms are regional global

In an Asian context, this implies that large firms from Japan, Korea, China, Singapore, Malaysia, Indonesia, etc. would expect to grow internationally at a faster pace within the broad triad of Asia: than in North America or Europe. Indeed, Collinson and Rugmm (2008) found this was precisely the nature of Japanese firm level competitiveness. Only a few Japanese firms such as Toyota, Honda and Sony have a significant presence in both North America and Europe. Otherwise, only Flextronics from Singapore has overcome the liabilities of inter-regional foreignness. In addition, Rugman found that three Korean firms are partially globalized and have more than 20 percent of their sales in North America. Rugrnan also analyzed the upstream supply chains of Korean firms (in terms of assets, the number of establishments, and the number of employees) but confirmed a strong regional presence for large Korean firms.

b. The FSA/CSA MatrixThe first framework brings together country and firm effects based upon Rugman. Country level factors are operationalized as home CSAs, while firm level factors are operationalized as FSAs. Based on the thinking which emphasizes firm and country effects, the following matrix (figure beside) offers a useful working framework to assess

the competitiveness of firms. On the vertical axis, we place CSAs either low or high. On the horizontal axis, we place FSAs either low or high. This leads to four cells for analysis.Cell 1 represents a situation in which only CSAs are important. Comparative advantage explains movements of goods and factors across nations. Financial capital depends upon

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interest rate differentials between countries. There will be MNEs in Cell 1 and their competitiveness will depend upon natural endowments of minerals, oil wells, forest products, hydro-electric power and other natural resources in their home country. MNEs will also have CSAs based upon cheap labor (for example, manufacturing in China), or cheap-skilled labor (information technology in India). Finally, there may be state owned MNEs which have been created by government policy, as in Singapore and some of the oil rich Persian Gulf countries.In Cell 4, only FSAs matter. The FSAs stand alone and are not influenced by CSAs. This is a cell reflecting the resource-based view of strategic management. The firm has strong FSAs which are unique and proprietary itself. There are isolating mechanisms (entry barrier) which prevent rival firms from acquiring the ESA. These isolating mechanisms may be entirely due to aspects of the organizational structure and the nature of the top management team, a type of Penrosean effect. When the resource-based view is applied to MNEs it is necessary to examine the internal network of the firms. There will be codification of internal knowledge FSAs and routines for its use within the internal network of the firm. In Cell 3, both FSAs and CSAs matter. The FSAs of the firms are enhanced and facilitated through home country CSAs. In general, there may be internal managerial tensions in reconciling CSAs and FSAs. The better managed MNEs successfully combine

FSAs and CSAs. In Cell 2, neither CSAs nor FSAs are important. Firms in this cell need to move to either Cell 1 (building upon CSAs) or to Cell 4 (by developing FSAs).The FSAICSA matrix of international business to analyze the competitiveness of large Asian firms we find that six Korean firms rely on CSAs in Cell 1. Three of Korea's nine firms have also developed strong FSAs and so operate in Cell 3. A total of 19 of Japan's firms rely on CSAs in Cell 1 but another 28 have developed

strong FSAs to complement he strong CSAs and operate in Cell 3. Finally, four of China's firms rely on strong CSAs in Cell 1, and only one is Cell 3 with strong FSAs to match.

c. The Regional Matrix

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The second framework was developed in Rugman (2005); it divides FSAs into two types - downstream FSAs (which are relevant to consumers and measured by firm sales) and upstream FSAs (which are more relevant to production activities and are measured by firm assets). These FSAs can be assessed across the home region of the triad, across two regions of the triad, or globally, which is across all three regions. In general, very few firms operate

globally, either in upstream assets FSAs or in downstream sales FSAs. Only 21 Asian firms operate across two or more triad regions by sales and only 12 by assets. The vast majority of firms operate mainly within their home region, both on upstream and downstream FSAs. We apply this framework to Asia's firms and find, indeed, that the great majority operates within the Asian home region. This is shown in figure beside. Figure also shows the gap between downstream and upstream FSAs in terms of geographic scope: the development of upstream FSAs is lagging behind that of downstream FSAs. This result implies that upstream FSAs are more location-bound (intra-regional) than are downstream FSAs. This is partly because upstream FSAs interact with home region CSAs and partly because upstream FSAs are not easily transferred to a foreign region due to the liability of inter-regional foreignness.It is important to note that the few Asian firms operating globally across all three regions of the triad, in terms of downstream sales, are mainly electronics firms like Samsung Electronics and LG Electronics from Korea; Canon, Sony, and Ricoh from Japan; and Flextronics from Singapore. The electronics industry builds strongly on Asia's CSAs. The electronics industry requires high-demand conditions (high income), educated labor, and supporting industries, and also needs cheap labor in the manufacturing process. Thus, the Asian electronics h n s developed their FSAs from strong CSAs in their home region of Asia. Yet, the upstream side of the Asian electronics firms is heavily focused on their home region. Only Sony and Flextronics have significant assets in foreign triad regions, but they still have more than 50 percent of their assets in Asia-Pacific (Sony is 52.3 percent and Flextronics is 54.4 percent).

ConclusionOne of the intriguing findings of this paper is that a large component of inter-national

competitiveness for Asian firms is achieved through intra-regional sales within the home region.

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Their international competitiveness depends on building up FSAs based upon home country CSAs, and exploiting these FSAs regionally. In this context, Asian firms are no different from those in North America and Europe. Across the world’s 500 largest firms the great majority of sales (and assets) occur within the home region of the triad. This implies that international competitiveness should not be confused with globalization. Asian firms do not compete globally; instead, they operate regionally.

In addition to the empirical contributions described above, this study provides new insights for practical international strategy formulation and implementation. As a firm operates largely in its home region, it should focus on developing (home) regional competitiveness. For a firm from Japan, its biggest competitors are likely to be from Korea and other Asian countries. Likewise, a European firm competes mainly with other European firms.

Cross border activities of an MNE have two goals as the MNE formulates and implements its international strategy. First, an MNE can reach economies of scale and scope by integrating across homogeneous countries. Since the MNE develops most of the important resources at its parent firm, the MNE is likely to integrate in its home region countries to attain cost-effectiveness in the application of its FSAs. An MNE can sell the same products and service in the same way within its home region. We have presented evidence showing that large firms generate about 75 percent of their downstream (sales) and upstream (assets) FSAs in their home region.

Second, an MNE may leverage diversification benefits by expanding into heterogeneous markets. However, it is highly questionable whether MNEs really pursue diversification benefits because their presence in foreign regions is not significant enough to obtain the diversification benefits (less than 25 percent of sales and assets). MNE may develop some FSAs and CSAs in a foreign region only when those FSAs and CSAs are unavailable in its home region. For example, most Asian electronics firms are more global than any other firms in terms of their geographic sales. However, those electronics firms develop their FSAs and CSAs and produce their products in their home region. Another example is Nike, which produces most of its products in Southeast Asian countries due to the cheap labor costs, a CSA. In contrast, Nike sells its products mainly, about 45 percent, in North America due to its brand awareness, an FSA, and demand condition, a CSA.

When an MNE aims to operate more than in one triad region, the MNE needs to develop different FSAs for other regions. Empirical evidence shows that only a few MNEs possess those capabilities, possibly due to cultural, institutional, economic, and political differences. In a foreign region, an MNE may prefer non-equity methods such as joint venture, partnership, and licensing contracts to wholly owned subsidiary due to the liability of intra-regional foreignness.

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