ISM Lecture 2

17 flashcards · Other · by Daniel F.

Why do firms internationalize?
Dunning and Porter: location advantages The advantages conferred upon the firm from its presence at a specific (geographic) location Home Country Location Advantages Host Country Location Advantages
Home Country Location Advantages
Porter’s Diamond Model Any company’s ability to compete internationally is based on an interrelated set of location advantages that certain industries in different nations possess Why certain industries within a particular nation are competitive internationally Why certain companies based in certain nations are capable of consistent innovation?
Porter’s Diamond factors
Factor Conditions different types of resources that may or may not be present in the home country basic factors: natural resources Advanced factors: human resources or research capabilities e.g. German car industry has expertise, Arab oil has oil Demand Conditions character of the home market has a disproportionate effect on how companies perceive, interpret and respond to buyer needs Nations gain competitive advantages in industries where the home demand gives their companies a clearer or earl…
Host Country Location Advantages
Dunning (1992) motivations to invest in host counties Market seeking The search for new customers and new markets e.g. Uber enters China, YOY +21% Resource seeking Natural resource seeking: search for resources, such as physical or human resources, in the host country e.g. Apple outsources to China Strategic resource seeking: Investments aimed at acquiring strategic resources (technology, brands, expertise) to enhance global competitiveness, often through mergers and acquisitions e.g. DiDi ente…
Which way do firms internationalize
The Uppsala Model: entry as a process The Born Global Concept: firms are basically already ready to internationalize for reasons
The Uppsala Model
firms gradually internationalize through incremental stages, emphasizing experiential learning and progressive commitment to foreign markets No export: gain experience of their domestic markets Export through intermediaries: operate abroad in a nearby market, and then slowly penetrated far away markets Direct export: chose to enter markets through export, instead of using sales or manufacturing subsidiaries of their own FDI: after several years of doing so the company established wholly owned o…
Born Global Model
Due to increased information, born global firms can directly enter even very distant markets almost immediately, without having to build a domestic base non-born local firms cannot do this Born globals have similar features Origin: they are from small markets, which forces them to internationalize early on Markets: they supply global niche markets, which forces them to internationalize to achieve scale Customers: multinational customers, and often internationalise simply to follow their custome…
How to asses country attractiveness
A generic 'Country Attractiveness Framework' — which identifies risks and opportunities at the country-, market- and industry-levels The CAGE Model — which focuses on distance as the main source of risk.
Generic Country Attractiveness Framework
Country Risk Analysis to general risks Political Risks Asset Destruction Asset Spoliation Economic Risks Economic Growth Inflation Input Costs Exchange Rates Operational Risks Employee Risks Kidnappings Sexual harassment Operational Risks Labour Unrest Racketeering Corruption Infrastructure Financial Restrictions Taxes and Charges Discrimination Cultural Risk Make opportunities to see if the specific market is good there Size Growth Quality Industry opportunities to see if the specific industry…
CAGE model
What matters is the degree of similarity/ distance when assessing country attractiveness Cultural Distance differences in language, social norms, religion, and values between countries. Administrative Distance This dimension covers differences in laws, regulations, and political systems Geographic Distance physical distance, time zones, climate, and infrastructure Economic Distance Economic distance encompasses differences in consumer wealth, income levels, and costs of resources.
Where do transaction costs come from?
Bounded Rationality Actors have limited cognitive ability to process information, foresee contingencies, and draft complete contracts Incomplete Contracts: Parties cannot anticipate all future scenarios, leading to gaps in agreements that require costly renegotiation or enforcement. Increased Search and Bargaining Costs: Time and resources are spent gathering and analyzing imperfect information. More complex transaction leads to higher risk of bounded rationality Bounded Reliability Actors may…
Transaction Cost Economics (TCE)
Ronald Coase: explains how firms decide whether to perform activities internally (hierarchies) or externally (markets) based on the costs associated with economic transactions Activities are internalised when the (transaction) costs of internalisation are lower than the costs of outsourcing. Activities are out-sourced when the (transaction) costs of out- sourcing are lower than the costs of internalising. 3 main sources of transaction costs Search Costs: Costs of finding information about suppl…
TCE Summary
Agency Theory (agent principal problem)
The agency problem arises when managers (agents) and shareholders (principals) have different goals due to the separation of ownership and control, leading to agency costs or losses. Principal-Agent Relationship: Principal pays agent to act on their behalf. Principal wants tasks done right, but agents may prioritize self-interest. Challenges in Observing Performance: Elements of performance are hard to observe. Principals can’t distinguish between: Good vs. Bad Agents Done vs. Done Right Differ…
Agency theory problem with foreign distributor entry mode
Low-risk strategy to access local knowledge/resources via independent distributors. Problem: Distributors may underinvest due to short-term focus; firms may not provide sufficient support. Solution: Align incentives between firms and distributors.
Combat foreign distributor entry mode agency problem with strategic alliance
Formal partnerships between firms to share resources, risks, and capabilities. Benefits: Share risks/costs. Access complementary resources. Develop new capabilities. Gain scarce resources like talent or technology. Challenges: Learning races (partners compete to learn faster). Reverse entry (partner enters independently). Outsourcing critical capabilities unintentionally. Solution: Limit scope of alliances; create alliance-specific advantages (ASAs).
Combat foreign distributor entry mode agency problem with M&A
Firms acquire others for full control of resources/markets or synergy creation. Problems: Underestimating integration costs (financial, managerial, business). Overestimating expected benefits (synergies often fail to materialize). High failure rates due to bounded rationality/reliability issues.