Week 1: Introduction to International Business Context
IBC consist of three pillars: institutional-, cultural-, and regulatory factors that influence strategy formulation and
implementation. Key IB theories & concepts that are also used in this course:
LoF = costs of doing business abroad
= fundamental assumption driving theories of MNEs (i.e. internalization theory, OLI, Uppsala)
MNE experiencing disadvantages to operating in foreign market due to:
- Spatial distance (travel, transportation & coordination costs)
- Unfamiliarity with the host country, adaption & learning costs
- Lack of legitimacy, (economic) nationalism by local stakeholders (e.g. buy local)
- Home country restrictions on host country activities
To overcome LoF, MNEs need to provide subsidiaries with FSAs (traditional view)
Distance No consensus on what is the ‘best’ distance to consider in IB
MNEs at a disadvantage in host country compared to domestic firms (LoF), due to distance
The effects of distance are difficult to anticipate
MNEs overcome distance with FSAs or isomorphism strategy
Distance is perceived to be negative, but sometimes there are positive effects on IB value creation
CAGE Cultural:
- A country’s cultural attributes determine how people interact with one another and with
companies and institutions
- Language, religion, ethnic/racial identify, shared history & norms
Administrative/Institutional:
- Encompasses differences in the regulatory, normative, and cognitive pillars of institutions
Geographic
Economic
OLI model = three types of advantages influencing FDI
Ownership advantages:
- (In)tangible assets (overlap with FSAs)
- Transactional advantages in coordinating network of geographically dispersed network
Location advantages:
- E.g. natural resources, demand conditions, cultural or institutional factors
- Aiming to acquire location-specific assets (e.g. knowledge, human capital, natural
resources): 4 FDI motives
Internalization advantages:
- Creating, transferring, deploying, recombining and exploiting FSAs internally instead of
via contractual arrangements with outside parties
Entry modes = choice of the form of operation firms use to enter foreign markets
Important in terms of: resource commitment; exploration vs. exploitation strategies; risk and
uncertainty; learning and knowledge transfer
Main factors to consider: home-host country distances; FDI motivation; host country
characteristics (i.e. political and economic risks, regulations); firm strategy
Uppsala Stages of internationalization (cumulative and path-dependent process based on experiential
market knowledge
Benefits of exploiting FSAs abroad > risks of operating in unknown foreign environments
- Firms initially expand to countries with low psychic distance
- After accumulating experience, MNEs expand into more distant countries
IBV (&RBV) “Given the influences of (in)formal framework on firm behaviour, any strategic choice that firm
make is inherently affected by formal and informal constraints of a given institutional framework”
Institutional framework are heterogenous
MNEs adapt strategic choices dealing with host countries heterogeneities: protection of IPR;
corruption & bribery; embargos & sanctions; terrorism; currency exchange risk
,Article: Berry, Guillén & Zhou (2010). An institutional approach to cross-national distance
The goal of this article is to disaggregate the construct of distance by proposing a set of multidimensional measures,
including economic, financial, political, administrative, cultural, demographic, knowledge, global connectedness, and
geographic distance. Defining and measuring distance along multiple dimensions is important because different types
of distance can affect firm, managerial or individual decisions in different ways, depending on the dimension of distance
under examination.
Existing approaches to cross-national distance are: Hofstede’s four measures of culture, Schwartz’s cultural values
framework, Ghemawat’s CAGE framework. However, as there are critics, this article provided a new theoretical
framework with 9 dimensions of cross-national distance (Table 1) and its indicators (Table 2).
,Article: Isenberg (2008). The global entrepreneur
- More and more start-ups are being born global.
- By tapping resources or serving customers across nations, entrepreneurs can take on larger rivals, chase global
opportunities, and use distance to create new products or services.
- Two reasons for internationalization: 1) defensive, i.e. be competitive; 2) offensive, i.e. more opportunities.
- Distances, differences in cultural contexts, the paucity of resources are the main challenges new ventures face.
- Successful entrepreneurs are clear in their purpose, strike alliances from positions of weakness, are able to
manage global supply chains, and can establish multinational organization from the outset.
, Learning questions:
1. Isenberg talks about “standing conventional theory on its head”. What does he mean by that? Why can firms
do this?
Traditional theories such as the Uppsala model argue that firms internationalize in experiential steps: the more
knowledge and experience a firm has, the more risk it will take. However, nowadays it is observed that start-ups do
business in many countries before dominating their home markets. Therefore it can be concluded that new ventures do
not follow the stages from the Uppsala model.
Firms can do this because the managers often have a global mindset (they might have experience from previous jobs).
Moreover many new ventures are software companies, enabling to go abroad easily.
2. What two reasons does Isenberg give for these new entrepreneurs to cross borders?
1) Defensive (in order to be competitive it is necessary to globalize some aspects of your business);
2) Offensive (a new business opportunity spans more than one country, and distance can be used to create new products
or services).
3. What three challenges do these new born entrepreneurs face?
1) Distance: both physical (geographical) and physic (cultural, political, economic).
2) Context: nations’ political, regulatory, judicial, tax, environmental, and labour systems vary. Global entrepreneurs
must deal with several countries simultaneously, which is complex.
3) Resources: customers expect start-ups to possess the skills and deliver the level of quality that larger companies do.
4. How do these 3 challenges fit different contextual frameworks discussed in the literature today?
Distance fit to the CAGE Framework by Ghemawat. Context fit to the Institutional Based View. Resources fit to the
Resource Based View.
5. What competencies do global entrepreneurs need?
1) articulating a global purpose; 2) alliance building; 3) supply-chain creation; and 4) multinational organization.
6. What is the bottom line of Isenberg’s thesis?
“Entrepreneurs shouldn’t fear the fact that the world isn’t flat. Being global may not be a pursuit for the fainthearted,
but even start-ups can thrive by using distance to gain competitive advantage.”
Thus, firms should use distance to gain competitive advantage. Distances makes it difficult because you have to managed
cultural differences, differences in LS between countries, differences in institutions, differences in people, differences
in time zones, etc. All these factors are fundamentally related to the fact that firms have decided to go global and use
distance.
IBC consist of three pillars: institutional-, cultural-, and regulatory factors that influence strategy formulation and
implementation. Key IB theories & concepts that are also used in this course:
LoF = costs of doing business abroad
= fundamental assumption driving theories of MNEs (i.e. internalization theory, OLI, Uppsala)
MNE experiencing disadvantages to operating in foreign market due to:
- Spatial distance (travel, transportation & coordination costs)
- Unfamiliarity with the host country, adaption & learning costs
- Lack of legitimacy, (economic) nationalism by local stakeholders (e.g. buy local)
- Home country restrictions on host country activities
To overcome LoF, MNEs need to provide subsidiaries with FSAs (traditional view)
Distance No consensus on what is the ‘best’ distance to consider in IB
MNEs at a disadvantage in host country compared to domestic firms (LoF), due to distance
The effects of distance are difficult to anticipate
MNEs overcome distance with FSAs or isomorphism strategy
Distance is perceived to be negative, but sometimes there are positive effects on IB value creation
CAGE Cultural:
- A country’s cultural attributes determine how people interact with one another and with
companies and institutions
- Language, religion, ethnic/racial identify, shared history & norms
Administrative/Institutional:
- Encompasses differences in the regulatory, normative, and cognitive pillars of institutions
Geographic
Economic
OLI model = three types of advantages influencing FDI
Ownership advantages:
- (In)tangible assets (overlap with FSAs)
- Transactional advantages in coordinating network of geographically dispersed network
Location advantages:
- E.g. natural resources, demand conditions, cultural or institutional factors
- Aiming to acquire location-specific assets (e.g. knowledge, human capital, natural
resources): 4 FDI motives
Internalization advantages:
- Creating, transferring, deploying, recombining and exploiting FSAs internally instead of
via contractual arrangements with outside parties
Entry modes = choice of the form of operation firms use to enter foreign markets
Important in terms of: resource commitment; exploration vs. exploitation strategies; risk and
uncertainty; learning and knowledge transfer
Main factors to consider: home-host country distances; FDI motivation; host country
characteristics (i.e. political and economic risks, regulations); firm strategy
Uppsala Stages of internationalization (cumulative and path-dependent process based on experiential
market knowledge
Benefits of exploiting FSAs abroad > risks of operating in unknown foreign environments
- Firms initially expand to countries with low psychic distance
- After accumulating experience, MNEs expand into more distant countries
IBV (&RBV) “Given the influences of (in)formal framework on firm behaviour, any strategic choice that firm
make is inherently affected by formal and informal constraints of a given institutional framework”
Institutional framework are heterogenous
MNEs adapt strategic choices dealing with host countries heterogeneities: protection of IPR;
corruption & bribery; embargos & sanctions; terrorism; currency exchange risk
,Article: Berry, Guillén & Zhou (2010). An institutional approach to cross-national distance
The goal of this article is to disaggregate the construct of distance by proposing a set of multidimensional measures,
including economic, financial, political, administrative, cultural, demographic, knowledge, global connectedness, and
geographic distance. Defining and measuring distance along multiple dimensions is important because different types
of distance can affect firm, managerial or individual decisions in different ways, depending on the dimension of distance
under examination.
Existing approaches to cross-national distance are: Hofstede’s four measures of culture, Schwartz’s cultural values
framework, Ghemawat’s CAGE framework. However, as there are critics, this article provided a new theoretical
framework with 9 dimensions of cross-national distance (Table 1) and its indicators (Table 2).
,Article: Isenberg (2008). The global entrepreneur
- More and more start-ups are being born global.
- By tapping resources or serving customers across nations, entrepreneurs can take on larger rivals, chase global
opportunities, and use distance to create new products or services.
- Two reasons for internationalization: 1) defensive, i.e. be competitive; 2) offensive, i.e. more opportunities.
- Distances, differences in cultural contexts, the paucity of resources are the main challenges new ventures face.
- Successful entrepreneurs are clear in their purpose, strike alliances from positions of weakness, are able to
manage global supply chains, and can establish multinational organization from the outset.
, Learning questions:
1. Isenberg talks about “standing conventional theory on its head”. What does he mean by that? Why can firms
do this?
Traditional theories such as the Uppsala model argue that firms internationalize in experiential steps: the more
knowledge and experience a firm has, the more risk it will take. However, nowadays it is observed that start-ups do
business in many countries before dominating their home markets. Therefore it can be concluded that new ventures do
not follow the stages from the Uppsala model.
Firms can do this because the managers often have a global mindset (they might have experience from previous jobs).
Moreover many new ventures are software companies, enabling to go abroad easily.
2. What two reasons does Isenberg give for these new entrepreneurs to cross borders?
1) Defensive (in order to be competitive it is necessary to globalize some aspects of your business);
2) Offensive (a new business opportunity spans more than one country, and distance can be used to create new products
or services).
3. What three challenges do these new born entrepreneurs face?
1) Distance: both physical (geographical) and physic (cultural, political, economic).
2) Context: nations’ political, regulatory, judicial, tax, environmental, and labour systems vary. Global entrepreneurs
must deal with several countries simultaneously, which is complex.
3) Resources: customers expect start-ups to possess the skills and deliver the level of quality that larger companies do.
4. How do these 3 challenges fit different contextual frameworks discussed in the literature today?
Distance fit to the CAGE Framework by Ghemawat. Context fit to the Institutional Based View. Resources fit to the
Resource Based View.
5. What competencies do global entrepreneurs need?
1) articulating a global purpose; 2) alliance building; 3) supply-chain creation; and 4) multinational organization.
6. What is the bottom line of Isenberg’s thesis?
“Entrepreneurs shouldn’t fear the fact that the world isn’t flat. Being global may not be a pursuit for the fainthearted,
but even start-ups can thrive by using distance to gain competitive advantage.”
Thus, firms should use distance to gain competitive advantage. Distances makes it difficult because you have to managed
cultural differences, differences in LS between countries, differences in institutions, differences in people, differences
in time zones, etc. All these factors are fundamentally related to the fact that firms have decided to go global and use
distance.
