Theories of International Business: Lectures 2024-2025
Lecture 1: 3 September 2024
Conceptualizing IB
- International business (IB): a business (or firm) that engages in international (cross-
border) economic activities
- Conceptual view on IB:
o The pursuit of value creating opportunities
▪ Value creating opportunities are made by taking the resource from one
country to another and reforming it into a different resource
• Example: taking oil from one country and reforming it into car gas
in the other
▪ By both public and private business organizations
▪ In countries other than their country of origin
- The study of IB more holistically considers both the foreign and domestic firms
Nature of international business research
- IB is about managing complexity and uncertainty:
o Cross-border activity brings new challenges due to certain border effects (e.g.,
country variations in terms of political, economic, and social systems)
o The differences require awareness and strategic thinking
- IB study and research by its very nature needs to be interdisciplinary and thus more
complex
o From a marketing perspective, legal perspective, business perspective (strategy
differ)
What is IB strategy about?
- How to outperform global competitors?
- Which (foreign) markets to enter?
- How to develop new products abroad?
- How to create synergies between headquarters (HQ) and subsidiaries?
- With which foreign firms/partners to cooperate?
- How to stimulate entrepreneurship?
- How to deal with home/host country changes?
What does IB deal with?
- Increased growth
o Market seeking motives of going abroad
- Resource & knowledge
o Access to natural resources
- Reduced risk & uncertainty
o Diversity of portfolio: what products you produce and deliver
- Efficiency
o How & where to locate
- Strategic assets: resources/capabilities that provide a firm with significant competitive
advantage in the global marketplace
o Resources a firm can use to have a unique asset in the market
o Example: sustainability, quality, reputation, superior managerial skills
o Makes them difference from the rest
o Can be valued by different customers
Why do we need an IB Strategy?
1
,Theories of International Business: Lectures 2024-2025
- Asymmetric information (agency): built a strategy to
compensate for the lack of knowledge
- Cognitive limitation (bounded rationality)
- Irrational behaviour
- Time limitation
- (Reduce) Uncertainty
- Structure & organization (planning)
- Establish a strategic goal
- How to reach the goal (from start to end)
Questions to ask
- When do firms go abroad?
- Where do firms go?
- How do firms go abroad?
Key theories & concepts of IB
- Value chain: the full lifecycle of a product or process, including material sourcing,
production, consumption and disposal/recycling processes
o The full range of activities that a business undertakes to create a product or
service (from conception to delivery to the customer)
- Transactional cost model: framework used to explain the costs associated with making
transactions, particularly in the context of firms and markets
o The model helps explain why companies exist, how they are structured, and why
certain business decisions (e.g., outsourcing or vertical integration) are made
- Internalization theory: explanation for why firms choose to internalize certain business
activities by owning and controlling foreign subsidiaries rather than relying on external
market relationships
o Emphasizes minimizing transaction costs, protecting intellectual property,
managing risks in foreign markets, and fully leveraging firm-specific advantages
as key drivers of this decision
o Relevant to explaining the behaviour and expansion of multinational enterprises
(MNEs)
o Helps to explain how MNEs manage and coordinate their operations across
borders to achieve competitive advantage while minimizing the risks and
inefficiencies that arise from external market transactions
o Emphasizes the internal flow of knowledge as a key component of minimizing
transaction costs and protecting firm-specific advantages
o The interaction between the external environmental and the internal knowledge
flows between MNE parent firm and subsidiaries
- Imperfect market(s): characterized by:
a. Having competition for market share (= ongoing effort by firms within a market to
increase or defend their portion of total sales, customers, or business in that
market relative to competitors)
b. High barriers to entry and exit
c. Different products and services
d. Small number of buyers and sellers
o All real-world markets are imperfect markets
- Product life cycle: stages a product goes through from its introduction into the market
until its eventually discontinued, five key stages:
1. Product development
2. Product introduction
2
,Theories of International Business: Lectures 2024-2025
3. Product growth
4. Product maturity
5. Product decline
- Liability of foreignness (LOF): the additional cost that a multinational enterprise (MNE)
(subsidiaries) or foreign firms face when they operate in a host country/foreign market
compared to local firms
o In the host country markets LOF arises in the form of:
▪ Unfamiliarity costs: stem from the lack of knowledge and experience that
foreign firms have in the host country
▪ Relational costs: due to differences in language, culture, and business
practices, foreign firms may struggle to build relationships and trust with
local stakeholders (e.g., customers, suppliers, government entities)
▪ Discrimination costs: foreign firms may face intentional or unintentional
discrimination either from the government (e.g., implement protectionist
policies that favour domestic companies) or from local businesses and
consumers (e.g., prefer buying from local firms)
- Eclectic paradigm/OLI Model: Ownership, Location, Internalization advantage
o A company needs all three advantages to successfully engage in foreign direct
investment (FDI)
- Stages Model of Internationalization/Uppsala Model: explains how companies intensify
their investments and activities in foreign markets
o It’s a learning experience, start low (e.g., with exporting) and gradually increase
when it has been a success)
- Psychic distance: behavioural concept capturing the uncertainty of decision makers
due to a lack of knowledge about foreign markets
- Institutions: an established organization or cooperation
Different levels of analysis
1. Country-level
2. Firm-level
a. MNE
b. Subsidiaries
3. Individual level
Why is IB crucial for you?
- Understand how globalization leads to ‘connectedness’ of:
o Businesses
o Markets
o People
o Information across countries
- Develop a global mindset and the necessary skills to evaluate and manage challenges
and opportunities in an increasingly complex global environment
- Effectively plan a career in business by understanding the barriers of doing business
with partners from other countries (agency, distance, LOF)
o Cultural, language, political systems, geography, and socio-economic factors all
influence a company’s business practices
3
, Theories of International Business: Lectures 2024-2025
Global value chains
- Global value chain: a full range of activities
required to produce a product/service
which spans across multiple countries/
international production sharing,
production is broken into activities and
tasks carried out in different countries
- For example: the airplane (right), which
consists of parts manufactured all around
the world
- Within each phase of the value chain,
value for the final product is being made
(MNEs)
- Multinational Enterprise (MNE): a firm that
owns and/or controls value creating activities in two or more different countries/ a firm
that uses FDI to establish or purchase income-generating assets abroad, but may also
trade goods and services across international borders
o Cross border activity
- Two definitions for MNE with different aspects:
1. Produce everything on the home front but trade across borders
2. Have value creating activities outside of own country
MNE structures
- Parent company/headquarters (HQ): a (group of) business(es) that owns and controls
another business/enterprise operating in another country
o Owns more than half of the shares of a subsidiary, which gives it control over the
subsidiary’s decisions and operations
- Subsidiary: company located in a host country (country other than HQ) that is owned by
a parent company who holds more than half of the shares
Foreign direct Investment (FDI)
- Foreign Direct Investment (FDI): an investment made to acquire lasting interest in
enterprises operating outside of the economy of the investors
o Capital decision to create a capital portfolio, avoid risks, etc.
- Investors’ purpose is to gain an effective voice in the management of the enterprise
o % of the equity ownership is considered an effective voice in the management of
an enterprise (degree of control)
- FDI differs from foreign portfolio investment as it aims at gaining control over (foreign)
enterprise
- Foreign portfolio investment (FPI): the acquisition of securities and financial assets in a
foreign market by investors seeking capital gains, dividends, or interest income
o Investing in financial assets (e.g., stocks, bonds) of entities situated in a different
country
- Lasting interest: should have an ambition to have a long-term impact
FDI, MNEs, and external complexity
4
Lecture 1: 3 September 2024
Conceptualizing IB
- International business (IB): a business (or firm) that engages in international (cross-
border) economic activities
- Conceptual view on IB:
o The pursuit of value creating opportunities
▪ Value creating opportunities are made by taking the resource from one
country to another and reforming it into a different resource
• Example: taking oil from one country and reforming it into car gas
in the other
▪ By both public and private business organizations
▪ In countries other than their country of origin
- The study of IB more holistically considers both the foreign and domestic firms
Nature of international business research
- IB is about managing complexity and uncertainty:
o Cross-border activity brings new challenges due to certain border effects (e.g.,
country variations in terms of political, economic, and social systems)
o The differences require awareness and strategic thinking
- IB study and research by its very nature needs to be interdisciplinary and thus more
complex
o From a marketing perspective, legal perspective, business perspective (strategy
differ)
What is IB strategy about?
- How to outperform global competitors?
- Which (foreign) markets to enter?
- How to develop new products abroad?
- How to create synergies between headquarters (HQ) and subsidiaries?
- With which foreign firms/partners to cooperate?
- How to stimulate entrepreneurship?
- How to deal with home/host country changes?
What does IB deal with?
- Increased growth
o Market seeking motives of going abroad
- Resource & knowledge
o Access to natural resources
- Reduced risk & uncertainty
o Diversity of portfolio: what products you produce and deliver
- Efficiency
o How & where to locate
- Strategic assets: resources/capabilities that provide a firm with significant competitive
advantage in the global marketplace
o Resources a firm can use to have a unique asset in the market
o Example: sustainability, quality, reputation, superior managerial skills
o Makes them difference from the rest
o Can be valued by different customers
Why do we need an IB Strategy?
1
,Theories of International Business: Lectures 2024-2025
- Asymmetric information (agency): built a strategy to
compensate for the lack of knowledge
- Cognitive limitation (bounded rationality)
- Irrational behaviour
- Time limitation
- (Reduce) Uncertainty
- Structure & organization (planning)
- Establish a strategic goal
- How to reach the goal (from start to end)
Questions to ask
- When do firms go abroad?
- Where do firms go?
- How do firms go abroad?
Key theories & concepts of IB
- Value chain: the full lifecycle of a product or process, including material sourcing,
production, consumption and disposal/recycling processes
o The full range of activities that a business undertakes to create a product or
service (from conception to delivery to the customer)
- Transactional cost model: framework used to explain the costs associated with making
transactions, particularly in the context of firms and markets
o The model helps explain why companies exist, how they are structured, and why
certain business decisions (e.g., outsourcing or vertical integration) are made
- Internalization theory: explanation for why firms choose to internalize certain business
activities by owning and controlling foreign subsidiaries rather than relying on external
market relationships
o Emphasizes minimizing transaction costs, protecting intellectual property,
managing risks in foreign markets, and fully leveraging firm-specific advantages
as key drivers of this decision
o Relevant to explaining the behaviour and expansion of multinational enterprises
(MNEs)
o Helps to explain how MNEs manage and coordinate their operations across
borders to achieve competitive advantage while minimizing the risks and
inefficiencies that arise from external market transactions
o Emphasizes the internal flow of knowledge as a key component of minimizing
transaction costs and protecting firm-specific advantages
o The interaction between the external environmental and the internal knowledge
flows between MNE parent firm and subsidiaries
- Imperfect market(s): characterized by:
a. Having competition for market share (= ongoing effort by firms within a market to
increase or defend their portion of total sales, customers, or business in that
market relative to competitors)
b. High barriers to entry and exit
c. Different products and services
d. Small number of buyers and sellers
o All real-world markets are imperfect markets
- Product life cycle: stages a product goes through from its introduction into the market
until its eventually discontinued, five key stages:
1. Product development
2. Product introduction
2
,Theories of International Business: Lectures 2024-2025
3. Product growth
4. Product maturity
5. Product decline
- Liability of foreignness (LOF): the additional cost that a multinational enterprise (MNE)
(subsidiaries) or foreign firms face when they operate in a host country/foreign market
compared to local firms
o In the host country markets LOF arises in the form of:
▪ Unfamiliarity costs: stem from the lack of knowledge and experience that
foreign firms have in the host country
▪ Relational costs: due to differences in language, culture, and business
practices, foreign firms may struggle to build relationships and trust with
local stakeholders (e.g., customers, suppliers, government entities)
▪ Discrimination costs: foreign firms may face intentional or unintentional
discrimination either from the government (e.g., implement protectionist
policies that favour domestic companies) or from local businesses and
consumers (e.g., prefer buying from local firms)
- Eclectic paradigm/OLI Model: Ownership, Location, Internalization advantage
o A company needs all three advantages to successfully engage in foreign direct
investment (FDI)
- Stages Model of Internationalization/Uppsala Model: explains how companies intensify
their investments and activities in foreign markets
o It’s a learning experience, start low (e.g., with exporting) and gradually increase
when it has been a success)
- Psychic distance: behavioural concept capturing the uncertainty of decision makers
due to a lack of knowledge about foreign markets
- Institutions: an established organization or cooperation
Different levels of analysis
1. Country-level
2. Firm-level
a. MNE
b. Subsidiaries
3. Individual level
Why is IB crucial for you?
- Understand how globalization leads to ‘connectedness’ of:
o Businesses
o Markets
o People
o Information across countries
- Develop a global mindset and the necessary skills to evaluate and manage challenges
and opportunities in an increasingly complex global environment
- Effectively plan a career in business by understanding the barriers of doing business
with partners from other countries (agency, distance, LOF)
o Cultural, language, political systems, geography, and socio-economic factors all
influence a company’s business practices
3
, Theories of International Business: Lectures 2024-2025
Global value chains
- Global value chain: a full range of activities
required to produce a product/service
which spans across multiple countries/
international production sharing,
production is broken into activities and
tasks carried out in different countries
- For example: the airplane (right), which
consists of parts manufactured all around
the world
- Within each phase of the value chain,
value for the final product is being made
(MNEs)
- Multinational Enterprise (MNE): a firm that
owns and/or controls value creating activities in two or more different countries/ a firm
that uses FDI to establish or purchase income-generating assets abroad, but may also
trade goods and services across international borders
o Cross border activity
- Two definitions for MNE with different aspects:
1. Produce everything on the home front but trade across borders
2. Have value creating activities outside of own country
MNE structures
- Parent company/headquarters (HQ): a (group of) business(es) that owns and controls
another business/enterprise operating in another country
o Owns more than half of the shares of a subsidiary, which gives it control over the
subsidiary’s decisions and operations
- Subsidiary: company located in a host country (country other than HQ) that is owned by
a parent company who holds more than half of the shares
Foreign direct Investment (FDI)
- Foreign Direct Investment (FDI): an investment made to acquire lasting interest in
enterprises operating outside of the economy of the investors
o Capital decision to create a capital portfolio, avoid risks, etc.
- Investors’ purpose is to gain an effective voice in the management of the enterprise
o % of the equity ownership is considered an effective voice in the management of
an enterprise (degree of control)
- FDI differs from foreign portfolio investment as it aims at gaining control over (foreign)
enterprise
- Foreign portfolio investment (FPI): the acquisition of securities and financial assets in a
foreign market by investors seeking capital gains, dividends, or interest income
o Investing in financial assets (e.g., stocks, bonds) of entities situated in a different
country
- Lasting interest: should have an ambition to have a long-term impact
FDI, MNEs, and external complexity
4
