Introduction to International Business Lecture 1 and 2 notes

Unique resources

Resources that make it possible for a company to have FSA’s

Each firm should have something in it in which its very good, better then rivals, create competitive advantage

• Physical resources (natural, buildings, plant equipment)
• Financial resources (equity and borrowed capital)
• Human resources (individuals and teams, entrepreneurial and operation skills)
• Upstream knowledge (marketing, sales, distribution, after sales service)
• Administrative knowledge (organizational structure, culture and systems)
• Reputational resources (brand names, reputation)

Routine

Ability to combine further the firm’s resources in unique ways over and over again.

Stable patterns of decision and actions that coordinate the use of resources and thereby generate value

How to handle processes and the (unique) resources. Handling not creating

Gives the opportunity to optimize the process of FSAs because it can become faster and employees become more self-confident as the routine gives everyone in the process a better idea of the process as a whole, due to repetition

A FSA can only be exploited abroad if it is a routine

Recombination skills

An MNE has unique resources, a way of handling them well (routine) and recombination skills; how to develop these unique aspects even more.

Locating resources (especially knowledge) as a response to differences between national and foreign environments and to satisfy new stakeholder demands in foreign environments

àThis is how a firm specific advantage is created

Without recombination, MNE will lose its competitive advantage. It has to keep generating new products, renew and develop.

Firm specific advantage

Firm-specific advantage and the source of its competitive advantage

Reflect the firm’s distinct strengths compared to its rivals and are the source of its competitive advantage in the market place

Stand alone resources
+
Routines
+ 

Recombination skills
=
Firm specific advantages

Two types of FSA’s

• Location bound (because)

• Immobile resources linked to location advantages home country

Distribution network

• Deep knowledge of local marketing

brand name: not valued abroad

• Local best practices: may be less productive across border

Many employees expensive in US

• A recombination capability that is difficult to transfer to a different context (entrepreneurial potential) format not liked

àcorresponding FSA will need to be created or acquired from 3^rdparties

• Non-location bound (mostly knowledge)

Strengths an MNE does not lose when going abroad, can be relocated in the host country: knowledge, technology, marketing

An organization has access to the location advantages of the home country

It uses some of those in combination with routines and recombination capabilities to create location bound FSA’s

A smaller subset of the developed FSA’s is non-location bound

Home Country Location Advantages

Strength of location is relative to strength of other locations

• Natural resources
• Superior educational system

Supports firms that build upon sophisticated HR skills

• Demanding sophisticated local market 

Fosters innovation

• Supportive tax system

LAs can apply to all firms within a country (tax)

Or within a cluster

Or they may reach across borders (trade agreements)

Cultural, economic, institutional and geographic distance between home and host country complicate development of location bound FSAs in host country

When transferring FSA’s across borders, firms need to build on 

Host country location advantages

Mostly generic (for all firms),sometimes specific for a firm

Strength of location is relative to strength of other locations

Needs to be a fitbetween the non-location bound FSA and the host country’s location advantage. 

àthen the FSA becomes location bound in the host country

Host country LAs are related to the reason for firms going to these countries

Paradox of transferable FSAs

Easily codifiable FSA can be transferred easily (low costs) butimitated easily as well.

FSAs consisting of tacit knowledge are hard to imitate buthard to transfer.

Most important tacit knowledge: administrative (key routines)

Complementary resources

Are needed to overcome difficulties in creating an LB FSA  in host country due to cultural, economic, institutional and geographic distance between home and host country in host country

Help can be provided by external actors if:

• Internal development of strengths is expected to bring lower net value than external 
• Need to rely on external actors can be satisfied in practice

Cooperating with a local partner may help if it is more efficient and not risky

Other difficulties that influence the ability of NLB FSAs to be transferred across border

Bounded rationality

Information is incomplete due to cognitive limitations of mangers or complexity

Information about the environment is incomplete because it is complex and uncertain

Also managers of home and host country select different information as relevant to strategy

Subsidiary managers often have an optimistic perspective on the future, they create an inside view based on the local information they receive directly from environment. They frame this in the form of demand forecasts etc. 

Projected scenarios from home country managers are often more pessimistic

Bounded reliability

Imperfect effort

• Opportunism is about false promises, self-interest, intentional
• Benevolent preference reversal: Initial promise is made in good faith, but preferences change over time. Unintentional. Local repriorization as a result of:

• Punishment for non-achievement
• Spatial distance from monitoring
• Satisfaction from locally driven investment opportunities that give local rewards

      Often result from over-commitment in the first place

      Not caused by lack of information

Bounded rationality is about the imperfect assessment of a present or future state of affairs, leading to incorrect beliefs

The imperfect effort to achieve goals leads to incomplete fulfilment of promises

Avoid bounded reliability in MNE

• Monitoring and contracts to align interest
• Joint goal development and segmentation and frequent communication about progress
• Routines for decision making

4 types of transferring FSAs abroad; partial usage of routines and recombination:

Centralized exporter

• Market seeker; their transferable FSAs are the final products
• No development of new LB FSAs or NLB FSAs
• FSA = standardized products produced at home essence does not change
• Host country LA = customers
• Subsidiaries act as facilitators of efficient home country production

International projector

• Transfers knowledge-based FSAs by cloning home operations

Only the internationally transferable ones to ensure same quality everywhere

• No development of new FSAs
• Directly to customers without creating LB knowledge

International coordinator

• Main transferable FSA = ability to coordinate LAs in host countries
• Use FSAs to develop LB FSAs that fit the host country’s location factors if needed
• Other LAs can be coordinated from home as they are practices by third parties
• Some countries require more NLB FSAs to be transferred to have access to LAs in the host country (production capacity to access resources)
• Vertical value chains across borders: formed by international operations specialized in specific value adding activities

Multi-centered MNE

• Each host country needs to build upon its own LB FSAs so they only transfer core routines (financial management or IT)
• Consists of a set of entrepreneurial subsidiaries abroad
• NLB FSAs that hold firms together are minimal
• Products cannot economically be transported; construction markets have local characteristics; local knowledge (entrepreneurial subsidiaries) are key to knowledge-based FSA development
• National responsiveness is the foundation of the strategy
• Need to develop alignment between own LB FSAs and LAs 

Ofcourse there are more types but the commonality among all types is the transfer of at least some FSAs across borders

àInternational business is about the interactionbetween firms (firm factor) and their FSAs and the locational characteristics of home and host country (country factor)

Prahalad and Hamel (firm factor)

Firms should focus on their (subsidiary’s) higher-order FSAs; their core competences

• Routines
• recombination capabilities
• Competence carriers (employees that can be deployed across business units because they carry the routines and recombination skills)

Core products are the result of core competencies

Areas of technological leadership from which end products are developed

Are put together to create end products 

Examples

Honda: cc is building compact engines; cp is compact engines; ep is automobiles

Sony: cc is recombination in electronics; cp is new features; ep is electronic goods

How to identify core competencies

not simply stand-alone FSA’s

• Difficult to imitate (coordination and learning)
• Potential access to wide variety of markets (recombination for success)
• Make a contribution to customers needs (satisfying stakeholders)
• A loss of a core competence would have a large negative effect on the firms present and future performance

Role of senior management

Develop structure to develop a road map of the future that identifies to core competencies to build the required technologies

Through internal resources or external acquisitions and alliances

Necessary to overcome decentralized units acting in self-interest = bounded rationality

Strategic architecture also fosters innovation, competitiveness and success

• Firm’s resource allocation should support strategic architecture

Competence carriers should be reallocated because they can be instrumental to resource recombination

• Divisions or subsidiaries should be made to justify location of operations and capital spending
• Incentive system should reward divisional managers to reduce reliability issues

These higher-order FSAs can be acquired through alliances instead of internal development

Skills of alliance partner is internalized and used in the creation of company’s own FSA

Two dangers:

• Know what FSA it is trying to build and know what you want to protect from being imitated to potential competitors
• Outsourcing may lead to loss of FSAs because there is no more development in these areas which leads to loss of knowledge and skills there, is loss of routines and recombination skills

Criticism on theory by Egelhoff

Core competences of firms in industries may differ:

Japanese companies focused on improving process technology for standard products as the key source of competitive advantage. By focusing on the core competence of process technology, Japanese companies achieved low costs and high quality for their standardized products 

Also, Japanese firms are more skilled at strategy implementation than American ones. They are more effective in an industry where productivity and ‘just in time production systems’ are important 

Americans are superior in economies of scale as they focus on differentiation and a high diversity of products. Aim to achieve short-term profitability.

US approach may be better in industry with technological change and commercial breakthroughs as they focus on the early profit and then leave as soon as price competition starts; anticipation of the future and rapid profit building

àdifferent industries require different FSA types

Depends on environment: dynamic requires flexibility

Example

Americans were still focused on differentiation and taking over Japanese production innovation didn’t help much since Japan kept innovating. Detroit invented vans and SUVs but apparently this capability is not a core competence because Japans market share here increased. This means that the routines are not hard to imitate.

Criticism by Bartmess and Cerny

Managers must link the FSAs to local advantages, this role is underestimated. Role of strategic management overestimated; host country location factors underestimated

MNEs think they can access LAs automatically by moving operations there but that assumption is built up on two mistakes reflecting bounded rationality of senior managers:

• Manufacturing knowledge is not a stand-alone FSA

Core competences involve combination of stand-alone knowledge, so knowledge embedded in one functional area is not a cc.

To be successful, entire set of  bundles resources involved in routine or rec activity should be transferred abroad. Links between processes in chain often cc

àattractiveness of LAs must consider complexities of exploiting and augmenting FSAs

Criteria for co-locating activities: (scope of rationality problem)

1. Complexitymore complex info between activities requires geographic proximity
2. Interaction lower predictability of information and need for two-way communication requires proximity of activities
3. Similarity of background and expertise less similarity makes communication and understanding of importance harder
4. Prior relationship is sometimes necessary for parties to have confidence in each other, absence of prior relationships requires more proximity
5. Concreteness of information

Less concrete is higher need for face-to-face

            àco-location requirements determine which locations make sense beyond LAs

Porter (country factor)

Ability to compete in the international arena is based on location advantages in the home country.

High level of pressure in the home country requires the firm to innovate and upgrade which results in FSA creation, needed for expansion. Gain advantage against world’s best competitors

Competitiveness depends on capacity of industry to innovate and upgrade.

MNEs benefit from having strong domestic rivals and other pressures.

FSA creation is not a result form entrepreneurial drive but external pressure

Which home location advantages?

1. Factor conditions

• Capital, labor, technology (so production)
• Especially valuable if specialized = customized for deployment in specific economic activities and companies
• Stimulates organisation because it will have to continuously develop new skills related to production and adaptation to problematic situations
• Not be inherited but used with intelligence

2. Demand conditions

• Domestic market size
• Domestic buyer sophistication
• If buyers are demanding, pressure increases, competitiveness increases
• Gain early insights into future needs of customers across borders; potential to be first-movers

3. Related and supporting industries

• High quality suppliers, universities do research to maintain reputation
• Important for innovation through exchange of ideas, feedback and communication

4. Firm strategy

• Competitive industry
• Not-sheltered protective markets
• Well-functioning industry

External factors:

5. Government and chance

• Well-functioning and not corrupt
• Luck

àthe diamond of competitive advantage cannot be identified for a national/regional economy as a whole. It will be different for each specific industry considered.

àindustry specific pressures with interactions among diamond determinants lead to innovation and productivity thus to international competitiveness 

àFSAs strengthened through building upon complementary resources arising out of industry context

During this time, people said that the resource-poor Japan did so well as a result of superior management practices. Porter argued against this.

Question was raised how US should increase competitiveness, Porter suggested domestic rivalry.

Leads to productivity improvements wand long term innovation.

Criticism on Porter

• Focus on industries at national level, not on firm specific challenges so not useful to understand what LAs mean to certain firm
• FSAs are completely domestically determined
• Too much emphasis on home country
• Misses one IB key point: link between FSA and LA’s of host country

Only way to be able to expand abroad.

Criticism on porter by Kuemmerle

Accepts Porters theory on home country LAs but states that firms also need to overview host country LAs. In some cases, firms look across borders to find stand-alone resources as capital, while maintaining operations in home country.

He warns for aggressive internationalization over all because the link with LAs and complementary resources of partners is very important as well = rationality problem when moving to fast

This warning of moving to fast supports Porters theory of developing FSAs domestically first. But he states that newly established companies can successfully expand internationally with low-cost, low-risk

Criticism on Porter by Teece

Diamond breaks down when foreign investors can provide complementary resources not provided by domestic diamond itself but instrumental to domestic sustainability and expansion.

Inward FDI when foreign capital is invested in local resources

Inward FDI can bridge between LAs of both countries

Some LAs of the host country bring a set of FSAs the firms could not develop themselves bui building upon the advantages of home country diamond. Only through acquisitions and partnerships

àexample: melding diamonds through FDI investment

Porter rejects relevance of multi-centered MNE and international coordinator

Porter in Verbekes figure:

LAs in home country are key source of LB FSA, recombination derives from interplay among diamond

Strong diamond leads to innovation and eventually to NLB FSAs to exploit abroad.

Focus on pattern ll of FSA developmentfsa at home and upgraded to be transferable