International Management - summary
Lecture 1
What is a multinational enterprise, depends on:
- Number of foreign subsidiaries (company controlled by larger
company > certain number of foreign subsidiaries makes you
multinational)
- Proportion of foreign sales
= A firm that is internationally active in a substantial way
Activities that international firms engage in
1. Exporting: produce goods or services in one country and export/sell
in a different country.
2. Licensing: give a foreign firm the right to produce and sell your
product under your name. Licensing agreement to sell your ‘recipe’,
let another company sell your product for money so you get
international market. This is not a subsidiary. Franchising is a form
of this.
3. Foreign Direct Investment (FDI): investment by another company
into another company in a different country, so you have a
substantial amount of control over it. Big commitment and decision.
The liability of foreignness
Multinationals are at a disadvantage against local companies in a country.
It covers all the additional costs that a firm operating in a market oversees
incurs that a local firm does not incur.
(mentioned by students in lecture) Extra costs may include research costs
to get to know the market, marketing and promotion costs to create brand
awareness in the foreign market, communication/traveling cost, HR costs.
Four sources for the liability of foreignness
1. Costs directly associated with spatial distance: transportation,
travel, and coordination between distances and time zones
2. Firm specific costs: research on familiarity with the market;
customer preferences, partners
3. Costs from the host country environment: lack of legitimacy (brand
awareness)
4. Costs from the home country environment: e.g. restrictions on high-
technology sales
The OLI framework - What the determines are for Foreign Direct
Investment
It is done by a company when they process three types of
resources/advantages which are Ownership, Location and Internalization
advantages.
- Ownership advantages: competitive advantages or VRIN
resources that are transferable across borders and enable
, competitive advantage building abroad. They should be relative to
the local country/context: do you also have a competitive advantage
there?
- Location advantages: specifically focused on host country
environment. What are the immobile, natural or creative
endowments which firms need to use jointly with their own
competitive advantages, that favor a presence in that market.
- Internalization advantages: net benefits of internalizing cross-
border intermediate product markets rather than license foreign
production to a foreign firm. Is it worth it to go there instead of just
licensing?
These advantages are linked to the international activities. Without
ownership advantages, they should stay local. Location advantages can
influence exporting, and you should check internalization advantages
when making a decision between licensing and FDI.
Lecture 2 – location advantages
Why would Tesla locate in Nevada, United States?
Open location, tax benefits, main producer of lithium is in Nevada so close
to supplier, make use of the sun for solar panels
Why would Tesla locate in Shanghai, China?
Biggest harbour, largest EV market
Why would Tesla locate in Berlin, Germany?
Central location in Europe, access to high skilled labour, government is
promoting EV’s in Germany
Location advantages in the OLI model
What are natural and created endowments? Natural is for instance the
climate, and created is for instance the infrastructure in a big harbour. In
the history of research on location advantages, early studies focused on
natural endowments and recent research focused on created
endowments. Natural resources are considered a mixed blessing. Dutch
disease (gas fields in Groningen): economic phenomenon where the rapid
development of one sector of the economy precipitates a decline in other
sectors. Multinationals claim the best human resources, leading to brain
drain.
Natural: e.g. presence in Kuwait. Created: e.g. presence in Silicon Valley.
When a firm has an ownership advantage, they will likely internationalize.
If not, they will remain domestic. If the location has an advantage, they
can choose to engage in licensing or FDI. If not, they produce at home and
just export. If they have an internalizing advantage, they will choose FDI.
, The location-decision process: objectives > strategy > overlaying
tactic: choice of countries. Objective of the location-decision making
process: maximizing the return on investment and minimizing the risk.
Scanning and detailed analysis.
Step 1: scanning
Broad examination and narrowing down to the most promising countries.
What information is important in scanning?
= Sales expansion, resource acquisition, political risk, monetary risk,
competitive risk.
Factor 1: sales expansion
Starting point: demographic and economic variables. Economic variables:
e.g. GDP per capita. However, this does not tell the full story. What to
consider then? Prices of essential goods and services, income elasticity,
cultural factors, income inequality, substitution, existence of trading blocs
(avoid import tariffs in other countries), obsolescence and leapfrogging of
products.
Factor 2: resource acquisition
Relevant factors to consider include labor, infrastructure, ease of
transportation and communication (digital network like internet?),
government (dis)incentives.
Factor 3: political risk
The possibility that political decisions, events, or conditions will affect a
country’s business environment in ways that will cost investors some or
all of the value of their investment or force them to accept lower-than-
projected rates of return. This may include: social unrest, demonstrations,
armed conflicts and terrorism, corruption and other factors related to the
international political environment.
Factor 4: foreign exchange risk
Two factors to consider: 1. Exchange-rate changes (affects purchasing
power in the target market, costs of hiring personnel, and profits if
repatriated). 2. Mobility of funds. Big consequences if you want to move
your funds and it is not worth anything. How easy is it to get rid of your
shares in a foreign market?
Example political and foreign exchange risks for Coca-Cola in Venezuela
Some of their initial location advantage: economic wealth thanks to
the oil boom, government incentives (tax benefits), youthful
population and urban growth (great so you can focus on specific
areas in a country).
Volatile business environment: strict economic policies imposed by
president, currency controls and hyperinflation (you can’t project
profits), government rhetoric against multinational enterprises,
Lecture 1
What is a multinational enterprise, depends on:
- Number of foreign subsidiaries (company controlled by larger
company > certain number of foreign subsidiaries makes you
multinational)
- Proportion of foreign sales
= A firm that is internationally active in a substantial way
Activities that international firms engage in
1. Exporting: produce goods or services in one country and export/sell
in a different country.
2. Licensing: give a foreign firm the right to produce and sell your
product under your name. Licensing agreement to sell your ‘recipe’,
let another company sell your product for money so you get
international market. This is not a subsidiary. Franchising is a form
of this.
3. Foreign Direct Investment (FDI): investment by another company
into another company in a different country, so you have a
substantial amount of control over it. Big commitment and decision.
The liability of foreignness
Multinationals are at a disadvantage against local companies in a country.
It covers all the additional costs that a firm operating in a market oversees
incurs that a local firm does not incur.
(mentioned by students in lecture) Extra costs may include research costs
to get to know the market, marketing and promotion costs to create brand
awareness in the foreign market, communication/traveling cost, HR costs.
Four sources for the liability of foreignness
1. Costs directly associated with spatial distance: transportation,
travel, and coordination between distances and time zones
2. Firm specific costs: research on familiarity with the market;
customer preferences, partners
3. Costs from the host country environment: lack of legitimacy (brand
awareness)
4. Costs from the home country environment: e.g. restrictions on high-
technology sales
The OLI framework - What the determines are for Foreign Direct
Investment
It is done by a company when they process three types of
resources/advantages which are Ownership, Location and Internalization
advantages.
- Ownership advantages: competitive advantages or VRIN
resources that are transferable across borders and enable
, competitive advantage building abroad. They should be relative to
the local country/context: do you also have a competitive advantage
there?
- Location advantages: specifically focused on host country
environment. What are the immobile, natural or creative
endowments which firms need to use jointly with their own
competitive advantages, that favor a presence in that market.
- Internalization advantages: net benefits of internalizing cross-
border intermediate product markets rather than license foreign
production to a foreign firm. Is it worth it to go there instead of just
licensing?
These advantages are linked to the international activities. Without
ownership advantages, they should stay local. Location advantages can
influence exporting, and you should check internalization advantages
when making a decision between licensing and FDI.
Lecture 2 – location advantages
Why would Tesla locate in Nevada, United States?
Open location, tax benefits, main producer of lithium is in Nevada so close
to supplier, make use of the sun for solar panels
Why would Tesla locate in Shanghai, China?
Biggest harbour, largest EV market
Why would Tesla locate in Berlin, Germany?
Central location in Europe, access to high skilled labour, government is
promoting EV’s in Germany
Location advantages in the OLI model
What are natural and created endowments? Natural is for instance the
climate, and created is for instance the infrastructure in a big harbour. In
the history of research on location advantages, early studies focused on
natural endowments and recent research focused on created
endowments. Natural resources are considered a mixed blessing. Dutch
disease (gas fields in Groningen): economic phenomenon where the rapid
development of one sector of the economy precipitates a decline in other
sectors. Multinationals claim the best human resources, leading to brain
drain.
Natural: e.g. presence in Kuwait. Created: e.g. presence in Silicon Valley.
When a firm has an ownership advantage, they will likely internationalize.
If not, they will remain domestic. If the location has an advantage, they
can choose to engage in licensing or FDI. If not, they produce at home and
just export. If they have an internalizing advantage, they will choose FDI.
, The location-decision process: objectives > strategy > overlaying
tactic: choice of countries. Objective of the location-decision making
process: maximizing the return on investment and minimizing the risk.
Scanning and detailed analysis.
Step 1: scanning
Broad examination and narrowing down to the most promising countries.
What information is important in scanning?
= Sales expansion, resource acquisition, political risk, monetary risk,
competitive risk.
Factor 1: sales expansion
Starting point: demographic and economic variables. Economic variables:
e.g. GDP per capita. However, this does not tell the full story. What to
consider then? Prices of essential goods and services, income elasticity,
cultural factors, income inequality, substitution, existence of trading blocs
(avoid import tariffs in other countries), obsolescence and leapfrogging of
products.
Factor 2: resource acquisition
Relevant factors to consider include labor, infrastructure, ease of
transportation and communication (digital network like internet?),
government (dis)incentives.
Factor 3: political risk
The possibility that political decisions, events, or conditions will affect a
country’s business environment in ways that will cost investors some or
all of the value of their investment or force them to accept lower-than-
projected rates of return. This may include: social unrest, demonstrations,
armed conflicts and terrorism, corruption and other factors related to the
international political environment.
Factor 4: foreign exchange risk
Two factors to consider: 1. Exchange-rate changes (affects purchasing
power in the target market, costs of hiring personnel, and profits if
repatriated). 2. Mobility of funds. Big consequences if you want to move
your funds and it is not worth anything. How easy is it to get rid of your
shares in a foreign market?
Example political and foreign exchange risks for Coca-Cola in Venezuela
Some of their initial location advantage: economic wealth thanks to
the oil boom, government incentives (tax benefits), youthful
population and urban growth (great so you can focus on specific
areas in a country).
Volatile business environment: strict economic policies imposed by
president, currency controls and hyperinflation (you can’t project
profits), government rhetoric against multinational enterprises,
