Lecture 1: Core concepts & Firm Specific Advantages
Strategy objectives
We assume that the general objective of strategy is: achieving sustainable competitive advantage
leading to above- average economic performance. This usually involves building upon firm-
specific advantages such as core knowledge, competencies, efficiencies, and business models
What is international strategy?
Matching a multinational enterprise’s (MNE’s) internal strengths
• With the opportunities and challenges found in cross-border environments
• While overcoming the disadvantages of being a foreign company
• And/or capitalizing on the advantages of being a foreign company
• And/or capitalizing on the advantages of having an international network
Elements of international strategy (Benito, 2015)
The WHY, WHERE, WHAT and HOW of internationalization
WHY internationalize?
• Market seeking
o New market and customers
• Efficiency seeking
▪ E.g., lower cost of production and/or cost of labor
• Resource seeking
▪ Access to more inputs, raw materials etc.
• Strategic asset seeking
▪ ‘The crucial point is that strategic asset-seeking is forward-looking. It is about
developing new resources and capabilities that can generate future streams of
revenue, not exploiting already existing ones.’
▪ Focus on gaining sustained competitive advantage
▪ Strategic asset seeking is often for knowledge
▪ ‘Between resource seeking and strategic asset seeking there is kind of a blur’
WHERE internationalize?
• Attractiveness of country
• ‘Distance’ to home country
WHAT aspect of business are we going to internationalize? (upstream or downstream?)
• Marketing & sales
• Manufacturing
• Purchasing, extraction
• R&D
HOW are we going to internationalize?
• Export
• Licensing
• Franchising
• JV/Alliance
• FDI
o Greenfield
o Brownfield
Internationalization theory: these choices are fundamentally about finding the most
efficient (cost minimizing) way of operating abroad. For example, establishing a subsidiary in a
foreign country, often referred to as FDI, would be the preferred choice of operating when the joint
costs of performing and governing an activity – or a set of activities – in-house are lower than
the equivalent costs of other options, such as exports, licensing or alliances.
Combination of motives
Companies that aspire to compete globally are often inclined to pursue several motives at the same
time and are often not single-minded in their internationalization. Firstly, because companies may
evolve in their internationalization over time and secondly because some companies do a variety of
activities abroad concurrently (at the same time), but for different reasons and without one given
motive necessarily dominating other.
1
,Elements of International Strategy (Benito, 2015)
Example exam question:
Using the paper “Why and how motives (still) matter” by Benito (2015), explain the difference
between market seeking and efficiency seeking FDI in terms of the key “Where” “How” and What”
factors.
Foundations of International Business Strategy
1. Internationally transferable (or non-location bound) firm-specific advantages (FSAs)
2. Non transferable (or location bound) FSAs
3. Location advantages
4. Investment in – and value creation through – resource recombination
5. Complementary resources of external factors
6. Bounded rationality
7. Bounded reliability
+ Advantages of foreignness: cultural attraction and arbitraging
1 & 2. FSAs (Transferable and non-transferable)
The MNE’s unique resources base
• Physical resources
• Human resources
• Financial resources
• Upstream resources
• Downstream resources
• Administrative resources
• Reputational resources
FSAs that are transferable abroad: non-location bound FSAs:
o Patents
o Money
o International brand name/image (Apple)
FSAs that are NOT transferable abroad: location-bound FSAs
o Brand name/image is not always transferable (Swapfiets)
o Supplier network not always transferable
Hong Kong hotel chain’s focus was on service, they wanted to internationalize to the US. They had
many employees to provide this service in Hong Kong. However, this was too expensive in the US
so they could transfer this FSA.
C.K. Prahalad and Gary Hamel: ‘The core competence of the corporation’, HBR 1990
Core competences are key to the competitive advantage, a core competence should:
1. Provide access to a wide variety of markets, and
2. Contribute significantly to the end-product benefits, and
3. Be difficult for competitors to imitate
2
, 3. Location Advantages
Location specific advantages:
o E.g., Silicon Valley
o Large market of potential consumers
o Tesla went to Germany because of the car industry there
▪ So it is a better place for R&D, for example
4. Recombination of capabilities
• Artful orchestration of resources, especially knowledge bundles e.g., Honda
o E.g., Honda recombining capabilities by transferring Japanese employees
to the US so they combine their knowledge
• In the international arena, recombination capabilities are built up through international
experience!
o Host-country specific experience
o General internationalization experience
5. Complementary resources of external factors
• Market knowledge/access
• Government connections
• Complementary technology
Reason: cultural, economic, institutional and spatial ‘distance’
Meaning: missing success ingredients
6 & 7. Liability of foreignness (LOF)
LoF: is a term describing the additional costs that firms operating outside their home countries
experience above those incurred by local firms.
A foreign firm (e.g., an MNE) has an a-priori disadvantage vis-à-vis a local firm, because of
geographic, linguistic, economic, political, educational, institutional, cultural, etc., distance. It is the
disadvantage you have by being a foreign company in a foreign country
Bounded rationality
The idea that we do not have all the information, we don’t understand everything. It is the scarcity
of the mind.
• Imperfect assessment of a present or future state of affairs, thereby leading to incorrect
beliefs.
Bounded reliability
Scarcity of effort
• Imperfect effort towards pre-specified goal achievement, thereby leading to incomplete
fulfillment of promises
There are advantages of foreignness
A foreign firm (e.g., an MNE) has an a-priori disadvantage vis-à-vis a local firm, because of:
o Cultural attractiveness:
▪ US fastfood, French wine & luxury goods, Italian design
▪ E.g., Apple being known as the best American tech company
o The possibility of arbitraging between different regimes
▪ E.g., costs of input, taxes, environmental and labor standard
3
Strategy objectives
We assume that the general objective of strategy is: achieving sustainable competitive advantage
leading to above- average economic performance. This usually involves building upon firm-
specific advantages such as core knowledge, competencies, efficiencies, and business models
What is international strategy?
Matching a multinational enterprise’s (MNE’s) internal strengths
• With the opportunities and challenges found in cross-border environments
• While overcoming the disadvantages of being a foreign company
• And/or capitalizing on the advantages of being a foreign company
• And/or capitalizing on the advantages of having an international network
Elements of international strategy (Benito, 2015)
The WHY, WHERE, WHAT and HOW of internationalization
WHY internationalize?
• Market seeking
o New market and customers
• Efficiency seeking
▪ E.g., lower cost of production and/or cost of labor
• Resource seeking
▪ Access to more inputs, raw materials etc.
• Strategic asset seeking
▪ ‘The crucial point is that strategic asset-seeking is forward-looking. It is about
developing new resources and capabilities that can generate future streams of
revenue, not exploiting already existing ones.’
▪ Focus on gaining sustained competitive advantage
▪ Strategic asset seeking is often for knowledge
▪ ‘Between resource seeking and strategic asset seeking there is kind of a blur’
WHERE internationalize?
• Attractiveness of country
• ‘Distance’ to home country
WHAT aspect of business are we going to internationalize? (upstream or downstream?)
• Marketing & sales
• Manufacturing
• Purchasing, extraction
• R&D
HOW are we going to internationalize?
• Export
• Licensing
• Franchising
• JV/Alliance
• FDI
o Greenfield
o Brownfield
Internationalization theory: these choices are fundamentally about finding the most
efficient (cost minimizing) way of operating abroad. For example, establishing a subsidiary in a
foreign country, often referred to as FDI, would be the preferred choice of operating when the joint
costs of performing and governing an activity – or a set of activities – in-house are lower than
the equivalent costs of other options, such as exports, licensing or alliances.
Combination of motives
Companies that aspire to compete globally are often inclined to pursue several motives at the same
time and are often not single-minded in their internationalization. Firstly, because companies may
evolve in their internationalization over time and secondly because some companies do a variety of
activities abroad concurrently (at the same time), but for different reasons and without one given
motive necessarily dominating other.
1
,Elements of International Strategy (Benito, 2015)
Example exam question:
Using the paper “Why and how motives (still) matter” by Benito (2015), explain the difference
between market seeking and efficiency seeking FDI in terms of the key “Where” “How” and What”
factors.
Foundations of International Business Strategy
1. Internationally transferable (or non-location bound) firm-specific advantages (FSAs)
2. Non transferable (or location bound) FSAs
3. Location advantages
4. Investment in – and value creation through – resource recombination
5. Complementary resources of external factors
6. Bounded rationality
7. Bounded reliability
+ Advantages of foreignness: cultural attraction and arbitraging
1 & 2. FSAs (Transferable and non-transferable)
The MNE’s unique resources base
• Physical resources
• Human resources
• Financial resources
• Upstream resources
• Downstream resources
• Administrative resources
• Reputational resources
FSAs that are transferable abroad: non-location bound FSAs:
o Patents
o Money
o International brand name/image (Apple)
FSAs that are NOT transferable abroad: location-bound FSAs
o Brand name/image is not always transferable (Swapfiets)
o Supplier network not always transferable
Hong Kong hotel chain’s focus was on service, they wanted to internationalize to the US. They had
many employees to provide this service in Hong Kong. However, this was too expensive in the US
so they could transfer this FSA.
C.K. Prahalad and Gary Hamel: ‘The core competence of the corporation’, HBR 1990
Core competences are key to the competitive advantage, a core competence should:
1. Provide access to a wide variety of markets, and
2. Contribute significantly to the end-product benefits, and
3. Be difficult for competitors to imitate
2
, 3. Location Advantages
Location specific advantages:
o E.g., Silicon Valley
o Large market of potential consumers
o Tesla went to Germany because of the car industry there
▪ So it is a better place for R&D, for example
4. Recombination of capabilities
• Artful orchestration of resources, especially knowledge bundles e.g., Honda
o E.g., Honda recombining capabilities by transferring Japanese employees
to the US so they combine their knowledge
• In the international arena, recombination capabilities are built up through international
experience!
o Host-country specific experience
o General internationalization experience
5. Complementary resources of external factors
• Market knowledge/access
• Government connections
• Complementary technology
Reason: cultural, economic, institutional and spatial ‘distance’
Meaning: missing success ingredients
6 & 7. Liability of foreignness (LOF)
LoF: is a term describing the additional costs that firms operating outside their home countries
experience above those incurred by local firms.
A foreign firm (e.g., an MNE) has an a-priori disadvantage vis-à-vis a local firm, because of
geographic, linguistic, economic, political, educational, institutional, cultural, etc., distance. It is the
disadvantage you have by being a foreign company in a foreign country
Bounded rationality
The idea that we do not have all the information, we don’t understand everything. It is the scarcity
of the mind.
• Imperfect assessment of a present or future state of affairs, thereby leading to incorrect
beliefs.
Bounded reliability
Scarcity of effort
• Imperfect effort towards pre-specified goal achievement, thereby leading to incomplete
fulfillment of promises
There are advantages of foreignness
A foreign firm (e.g., an MNE) has an a-priori disadvantage vis-à-vis a local firm, because of:
o Cultural attractiveness:
▪ US fastfood, French wine & luxury goods, Italian design
▪ E.g., Apple being known as the best American tech company
o The possibility of arbitraging between different regimes
▪ E.g., costs of input, taxes, environmental and labor standard
3
