Theme 1: Core IB Theories
Conceptualizing IB
International Business
→ A business that engages in international economic activities (Either Foreign or Domestic).
→ It is about managing complexity and uncertainty:
● Cross-border activities bring new challenges
● Require awareness and strategic thinking
Vertical Integration
→ using internal exchanges rather than market transactions to carry out a business activity
● Only adds value when the transaction is frequent enough to justify integration and
● Disadvantages
○ Increases asset base and capital employed
○ Reduces flexibility & Prevents access to external expertise
○ Impossible to fully benefit from supplier efficiency and scale
○ Reduces focus on core business/ capabilities
○ Converts variable costs into fixed costs
○ Blurs evaluation/ knowledge of costs
Outsourcing
→ Turning over an organizational activity to an outside supplier that will perform it on behalf
of the local firm
● Offshore → firm abroad
● Onshore → domestic firm
● Inconstrast to FDI where you set up subsidiaries abroad and the work done is
in-house but the location is overseas
Vertical Integration vs. Outsourcing?
● Problems associated with outsourcing
● Dependence created by co-specialization or co-location
● Inadequate performance: Customization/ quality/ availability
● Dependence created by market power
● Hold up Loss of critical know-how
● Weakened commitment/ Competitive signaling
● Spillover to competition
● Declining differentiation
, Global value chain: The Smiling Curve
Value chain and the boundary of the firm - Outsourcing and the corporate value chain
Multinational Corporation (MNC)
→ A company that engages in international (cross-border) economic activities
Transnational Corporations (TCN)
→ Are incorporated or unincorporated enterprises compromising parent enterprises and their
foreign affiliates
● Parent enterprise is an enterprise that controls assets of other entities in countries
other than its home country, usually by owning a certain equity capital stake
Foreign Direct Investment (FDI)
○ An investment made to acquire lasting interest in enterprises
○ Operating outside of the economy of the investor
○ The investors purpose is to gain an effective voice in the management of the
enterprise (UNCTAD)
○ FDI is a firm level strategic decision rather than a capital market financial
decision (Dunning and rugman 1985)
Conceptualizing IB
International Business
→ A business that engages in international economic activities (Either Foreign or Domestic).
→ It is about managing complexity and uncertainty:
● Cross-border activities bring new challenges
● Require awareness and strategic thinking
Vertical Integration
→ using internal exchanges rather than market transactions to carry out a business activity
● Only adds value when the transaction is frequent enough to justify integration and
● Disadvantages
○ Increases asset base and capital employed
○ Reduces flexibility & Prevents access to external expertise
○ Impossible to fully benefit from supplier efficiency and scale
○ Reduces focus on core business/ capabilities
○ Converts variable costs into fixed costs
○ Blurs evaluation/ knowledge of costs
Outsourcing
→ Turning over an organizational activity to an outside supplier that will perform it on behalf
of the local firm
● Offshore → firm abroad
● Onshore → domestic firm
● Inconstrast to FDI where you set up subsidiaries abroad and the work done is
in-house but the location is overseas
Vertical Integration vs. Outsourcing?
● Problems associated with outsourcing
● Dependence created by co-specialization or co-location
● Inadequate performance: Customization/ quality/ availability
● Dependence created by market power
● Hold up Loss of critical know-how
● Weakened commitment/ Competitive signaling
● Spillover to competition
● Declining differentiation
, Global value chain: The Smiling Curve
Value chain and the boundary of the firm - Outsourcing and the corporate value chain
Multinational Corporation (MNC)
→ A company that engages in international (cross-border) economic activities
Transnational Corporations (TCN)
→ Are incorporated or unincorporated enterprises compromising parent enterprises and their
foreign affiliates
● Parent enterprise is an enterprise that controls assets of other entities in countries
other than its home country, usually by owning a certain equity capital stake
Foreign Direct Investment (FDI)
○ An investment made to acquire lasting interest in enterprises
○ Operating outside of the economy of the investor
○ The investors purpose is to gain an effective voice in the management of the
enterprise (UNCTAD)
○ FDI is a firm level strategic decision rather than a capital market financial
decision (Dunning and rugman 1985)
