SUMMARY
INTERNATIONAL BUSINESS STRATEGY
CHAPTER 1 – CONCEPTUAL FOUNDATIONS OF IBS
International business strategy revolves around effectively and efficiently matching the internal strengths of a
multinational (MNE) with the opportunities and challenges in geographically distributed, cross-border
environments. That matching is a necessary condition for creating value and fulfilling the goals of all
stakeholders, both at home and abroad.
The central instrument for this is the unifying framework of 7 concepts, which structures the rest of the book:
- Internationally transferable (non-location-bound) FSAs
- Non-transferrable (location-based) FSAs
- Location benefits (LAs)
- Investment in and value creation through resource recombination
- Complementary resources of external actors
- Bounded rationality
- Bounded reliability
FIRM-SPECIFIC ADVANTAGES (FSAs)
An MNE builds on a broad resource base: physical resources (buildings, machines), financial resources, human
resources, upstream knowledge (technology, sourcing), downstream knowledge (marketing, distribution) and
administrative knowledge (organizational culture, systems). Based on those resources, an MNE develops FSAs =
specific strengths against competitors that are the source of competitive advantage.
FSAs come in two forms:
- Stand-alone (e.g. patents, brand names)
- Routines: stable patterns of decisions and actions that coordinate the productive use of resources.
o They represent a higher-order FSA: the ability to combine resources in unique, valuable ways.
o A classic example is FedEx, which developed routines to organize logistics on an unprecedented
scale.
Recombination goes beyond routines:
- It is the artful orchestration of resources, especially knowledge bundles, in response to the differences
between the home environment and foreign environments.
- Entrepreneurial judgment is central: the MNE must assess which resources need to be recombined and
how to create value in complex international contexts.
1
,Transferability of FSAs:
- Easily codifiable knowledge (set up in manuals or blueprints) is cheap to transfer abroad, but also easy
to imitate by competitors.
- Tacit knowledge – knowledge that can’t be explicitly articulated – is expensive and time-consuming to
bring across borders, but offers a sustainable competitive advantage because imitation is difficult.
This distinction leads to 2 types of FSAs:
- Non-location-bound (NLB) FSAs: internationally transferable, the
MNE can deploy them in multiple countries.
- Location-bound (LB) FSAs: not transferable abroad. 4 main types:
o Stand-alone resources linked to location advantages (e.g.,
privileged retail locations)
o Local marketing knowledge and reputational resources, such as brand names (may not be
applicable to a host country context, or valued to the same extent)
o Local best practices (i.e. routines), such as incentive systems or buyer-supplier relations (may
not work abroad)
o Domestic recombination capability (may not work in foreign markets
→ Even if the transfer is technically possible, that doesn’t guarantee that they will generate value in host market.
LOCATION ADVANTAGES (LAs)
Location benefits are the full set of strengths of a location that are accessible to the companies located there:
infrastructure, cluster effects, institutional quality, labor or raw materials. They should always be assessed
relatively: compared to other locations. In addition, not all MNEs benefit equally from the same location benefits.
The pyramid model in the framework illustrates the hierarchy: on the broad basis of homeland LAs, the MNE
builds a narrower set of location-related FSAs, and on top of that an even narrower initial set of NLB FSAs that are
transferable abroad.
INTERNATIONAL EXPANSION
MNEs choose Foreign Direct Investment (FDI) for various reasons:
- Natural resource seeking: access to raw materials or other physical inputs abroad.
- Market seeking: expansion to foreign markets.
- Strategic resource seeking: acquisition of knowledge, technology or human capital.
- Efficiency seeking: cost reduction through specialization and international division of labour.
With export (superficial integration), production takes place at home and products are shipped abroad. At FDI
(deep integration), intermediate resources (know-how) are first transferred, after which production takes place in
the host country. Both forms are expressions of the same underlying FSA logic, but require different
configurations of the framework.
2
,MNE-ARCHETYPES
Based on how FSAs are developed and transferred, Verbeke & Lee distinguish 4 ideal-typical MNE
configurations:
1. Centralized Exporter
o The MNE produces standardized products at home, based on favourable home country
conditions (including cluster effects).
o The NLB FSAs are anchored in the products themselves. No LB FSAs are developed in the host
country, and no formal FSA transfer takes place abroad.
o The homeland circle connects directly to the location benefits of the host country through the
exported product.
o Example: Hollywood motion picture studios.
2. International Projector
o The MNE transfers knowledge-related FSAs (the 'homeland success recipes') to foreign
subsidiaries.
o Those subsidiaries copy the homeland model: no new LB FSAs are built up in the host country,
because the existing NLB FSAs are sufficient to exploit the location benefits.
o The circles of home country and host country overlap because of the shared NLB FSAs.
o Examples: Ford, Disney
3. International Coordinator
o The MNE organizes specialized activities across multiple countries in vertical value chains.
o The core competence lies in seamlessly connecting geographically distributed operations
through superior logistics.
o The size of the overlaps between the home country and host country circles varies per host
country, depending on which specific LAs the MNE wants to use. Here, too, no LB FSAs are built
up in the host countries.
o Example: BP
4. Multi-centered MNE
o The multi-centered MNE consists of a collection of entrepreneurial
subsidiaries that are each strongly anchored locally and develop
FSAs themselves.
o National responsiveness is the strategic basis. The NLB FSAs that
hold the whole together are minimal: common financial
management and the identity of the owners. Substantial LB FSAs are built up per host country,
which explains the independent circles per host country.
o Examples: Philips (early), Lafarge
Combinations in practice
- In practice, large MNEs rarely fully conform to one
archetype. As companies grow internationally,
multiple patterns of FSA development and transfer
are visible at the same time. The book identifies ten
patterns of FSA development and recombination in
MNEs
3
, COMPLEMENTARY RESOURCES OF EXTERNAL ACTORS
When an MNE expands internationally, it sometimes does not have all the necessary resources internally.
Cultural, economic, institutional and spatial 'distance' creates gaps. In that case, it can fall back on external
actors: technology suppliers, licensees, local distributors, joint venture partners, and so on.
The conditions for this are twofold:
- Internal development would lead to a lower net present value or is simply not feasible
- External actors are willing and able to provide the required resources
LIMITATIONS AND CHALLENGES
BOUNDED RATIONALITY AND BOUNDED RELIABILITY
2 fundamental human limitations complicate international strategy decisions:
1. Bounded Rationality – scarcity of mind
o Managers are faced with information problems: insufficient access to good quality information
and limited mental capacity to process complex information bundles.
o This leads to incorrect beliefs about the current or future situation.
o The Xerox/Fuji-Xerox example illustrates how a lack of understanding of the local context leads
to suboptimal decisions.
2. Bounded Reliability – scarcity of effort
o Bounded reliability is not about knowledge, but about the willingness to keep agreements. There
are three sources:
▪ Opportunism: deliberate false promises in advance or returning to agreements
afterwards.
▪ Benevolent preference reversal: set in good faith local priorities that deviate from the
agreed goals (e.g. a subsidiary that is closer to the local stakeholders than to the
headquarters).
▪ Identity-based discordance: individuals do not fulfill obligations because they identify
more strongly with another group or identity.
The distinction is crucial: bounded rationality leads to wrong beliefs, bounded reliability to unfulfilled promises.
Both require specific safeguards in international governance.
STRATEGIC CHALLENGES IN THE NEW ECONOMY
Classic advantages of Western MNEs – economies of scale in production, knowledge reservoirs, new resource
combinations – are no longer sufficient. Two structural shifts undermine these traditional benefits: (1) the
emergence of emerging market MNEs (EMNEs) and (2) technological disruption via the 'internet of threats'.
4
INTERNATIONAL BUSINESS STRATEGY
CHAPTER 1 – CONCEPTUAL FOUNDATIONS OF IBS
International business strategy revolves around effectively and efficiently matching the internal strengths of a
multinational (MNE) with the opportunities and challenges in geographically distributed, cross-border
environments. That matching is a necessary condition for creating value and fulfilling the goals of all
stakeholders, both at home and abroad.
The central instrument for this is the unifying framework of 7 concepts, which structures the rest of the book:
- Internationally transferable (non-location-bound) FSAs
- Non-transferrable (location-based) FSAs
- Location benefits (LAs)
- Investment in and value creation through resource recombination
- Complementary resources of external actors
- Bounded rationality
- Bounded reliability
FIRM-SPECIFIC ADVANTAGES (FSAs)
An MNE builds on a broad resource base: physical resources (buildings, machines), financial resources, human
resources, upstream knowledge (technology, sourcing), downstream knowledge (marketing, distribution) and
administrative knowledge (organizational culture, systems). Based on those resources, an MNE develops FSAs =
specific strengths against competitors that are the source of competitive advantage.
FSAs come in two forms:
- Stand-alone (e.g. patents, brand names)
- Routines: stable patterns of decisions and actions that coordinate the productive use of resources.
o They represent a higher-order FSA: the ability to combine resources in unique, valuable ways.
o A classic example is FedEx, which developed routines to organize logistics on an unprecedented
scale.
Recombination goes beyond routines:
- It is the artful orchestration of resources, especially knowledge bundles, in response to the differences
between the home environment and foreign environments.
- Entrepreneurial judgment is central: the MNE must assess which resources need to be recombined and
how to create value in complex international contexts.
1
,Transferability of FSAs:
- Easily codifiable knowledge (set up in manuals or blueprints) is cheap to transfer abroad, but also easy
to imitate by competitors.
- Tacit knowledge – knowledge that can’t be explicitly articulated – is expensive and time-consuming to
bring across borders, but offers a sustainable competitive advantage because imitation is difficult.
This distinction leads to 2 types of FSAs:
- Non-location-bound (NLB) FSAs: internationally transferable, the
MNE can deploy them in multiple countries.
- Location-bound (LB) FSAs: not transferable abroad. 4 main types:
o Stand-alone resources linked to location advantages (e.g.,
privileged retail locations)
o Local marketing knowledge and reputational resources, such as brand names (may not be
applicable to a host country context, or valued to the same extent)
o Local best practices (i.e. routines), such as incentive systems or buyer-supplier relations (may
not work abroad)
o Domestic recombination capability (may not work in foreign markets
→ Even if the transfer is technically possible, that doesn’t guarantee that they will generate value in host market.
LOCATION ADVANTAGES (LAs)
Location benefits are the full set of strengths of a location that are accessible to the companies located there:
infrastructure, cluster effects, institutional quality, labor or raw materials. They should always be assessed
relatively: compared to other locations. In addition, not all MNEs benefit equally from the same location benefits.
The pyramid model in the framework illustrates the hierarchy: on the broad basis of homeland LAs, the MNE
builds a narrower set of location-related FSAs, and on top of that an even narrower initial set of NLB FSAs that are
transferable abroad.
INTERNATIONAL EXPANSION
MNEs choose Foreign Direct Investment (FDI) for various reasons:
- Natural resource seeking: access to raw materials or other physical inputs abroad.
- Market seeking: expansion to foreign markets.
- Strategic resource seeking: acquisition of knowledge, technology or human capital.
- Efficiency seeking: cost reduction through specialization and international division of labour.
With export (superficial integration), production takes place at home and products are shipped abroad. At FDI
(deep integration), intermediate resources (know-how) are first transferred, after which production takes place in
the host country. Both forms are expressions of the same underlying FSA logic, but require different
configurations of the framework.
2
,MNE-ARCHETYPES
Based on how FSAs are developed and transferred, Verbeke & Lee distinguish 4 ideal-typical MNE
configurations:
1. Centralized Exporter
o The MNE produces standardized products at home, based on favourable home country
conditions (including cluster effects).
o The NLB FSAs are anchored in the products themselves. No LB FSAs are developed in the host
country, and no formal FSA transfer takes place abroad.
o The homeland circle connects directly to the location benefits of the host country through the
exported product.
o Example: Hollywood motion picture studios.
2. International Projector
o The MNE transfers knowledge-related FSAs (the 'homeland success recipes') to foreign
subsidiaries.
o Those subsidiaries copy the homeland model: no new LB FSAs are built up in the host country,
because the existing NLB FSAs are sufficient to exploit the location benefits.
o The circles of home country and host country overlap because of the shared NLB FSAs.
o Examples: Ford, Disney
3. International Coordinator
o The MNE organizes specialized activities across multiple countries in vertical value chains.
o The core competence lies in seamlessly connecting geographically distributed operations
through superior logistics.
o The size of the overlaps between the home country and host country circles varies per host
country, depending on which specific LAs the MNE wants to use. Here, too, no LB FSAs are built
up in the host countries.
o Example: BP
4. Multi-centered MNE
o The multi-centered MNE consists of a collection of entrepreneurial
subsidiaries that are each strongly anchored locally and develop
FSAs themselves.
o National responsiveness is the strategic basis. The NLB FSAs that
hold the whole together are minimal: common financial
management and the identity of the owners. Substantial LB FSAs are built up per host country,
which explains the independent circles per host country.
o Examples: Philips (early), Lafarge
Combinations in practice
- In practice, large MNEs rarely fully conform to one
archetype. As companies grow internationally,
multiple patterns of FSA development and transfer
are visible at the same time. The book identifies ten
patterns of FSA development and recombination in
MNEs
3
, COMPLEMENTARY RESOURCES OF EXTERNAL ACTORS
When an MNE expands internationally, it sometimes does not have all the necessary resources internally.
Cultural, economic, institutional and spatial 'distance' creates gaps. In that case, it can fall back on external
actors: technology suppliers, licensees, local distributors, joint venture partners, and so on.
The conditions for this are twofold:
- Internal development would lead to a lower net present value or is simply not feasible
- External actors are willing and able to provide the required resources
LIMITATIONS AND CHALLENGES
BOUNDED RATIONALITY AND BOUNDED RELIABILITY
2 fundamental human limitations complicate international strategy decisions:
1. Bounded Rationality – scarcity of mind
o Managers are faced with information problems: insufficient access to good quality information
and limited mental capacity to process complex information bundles.
o This leads to incorrect beliefs about the current or future situation.
o The Xerox/Fuji-Xerox example illustrates how a lack of understanding of the local context leads
to suboptimal decisions.
2. Bounded Reliability – scarcity of effort
o Bounded reliability is not about knowledge, but about the willingness to keep agreements. There
are three sources:
▪ Opportunism: deliberate false promises in advance or returning to agreements
afterwards.
▪ Benevolent preference reversal: set in good faith local priorities that deviate from the
agreed goals (e.g. a subsidiary that is closer to the local stakeholders than to the
headquarters).
▪ Identity-based discordance: individuals do not fulfill obligations because they identify
more strongly with another group or identity.
The distinction is crucial: bounded rationality leads to wrong beliefs, bounded reliability to unfulfilled promises.
Both require specific safeguards in international governance.
STRATEGIC CHALLENGES IN THE NEW ECONOMY
Classic advantages of Western MNEs – economies of scale in production, knowledge reservoirs, new resource
combinations – are no longer sufficient. Two structural shifts undermine these traditional benefits: (1) the
emergence of emerging market MNEs (EMNEs) and (2) technological disruption via the 'internet of threats'.
4
