Ch10

Continued Economic development across globe has two consequences for MNEs

1) Rising wages and other costs are likely to negate any benefits of access to low cost input factors 2) As the standard of living rises in emerging economies, MNEs are hoping that increased purchasing power will enable workers to purchase the products they used to make the export only.

Geographic Distance

CAGE Distance Framework Costs to cross-border trade rise with geographic distance. It doesn't simply capture how far two countries are from each other but also includes additional attributes such as the country's physical size, within country distances to its borders, topography, time zones, contiguous or waterways and ocean Infrastructure, road, power, and telecommunications networks Relevant when trading products with low value to weight ratios such as steel, cement, or other bulk products, fragile and perishable products, glass or fresh meats and fruits

Multinational Enterprise (MNE)

Engine behind globalization A company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries. By making investments in value chain activities abroad, MNEs engage in foreign direct investment MNEs need an effective global strategy Disproportionately positive impact on the US economy

Integration responsiveness framework

Framework juxtaposes the opposing pressures for cost reductions and local responsiveness to derive four different strategic positions to gain and sustain competitive advantage when competing globally International Strategy Multidomestic Strategy Global standardization Strategy Transnational Strategy

State of Globalization

Many large firms are more than 50% globalized, half revenues are from outside the home country, the world itself is far less global The world is semi-globalized - many more gains in social welfare and living standards can be had through further globalization if future integration is managed effectively through coordinated efforts by governments.

Stages of Globalizatoin

Three notable stages Globalization 1.0 1900-1941 Globalization 2.0 1945-2000 Globalization 3.0 21st Century

Gain access to a larger market

Advantages of Going Global Gaining much more significant opportunities because economies of scale and scope that can be reaped by participating in a much larger market. They have an incentive to gain access to larger markets because this can reinforce the basis of their competitive advantage In turn allows MNEs to outcompete local rivals.

Economic Arbitrage

Companies from wealthy countries trade with companies from poor countries to benefit from this

Foreign Direct Investment

Firm's investments in value chain activities abroad.

Global standardization Strategy

Integration responsiveness framework Attempt to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best of class capabilities reside at the lowest cost. Globalization 3.0 Strive for the lowest cost position possible Their business strategy tends to be cost leadership, to be price competitive, MNE must maintain a minimum efficient scale.

CAGE Distance Framework

MNEs need to consider relative distance by using this model A decision framework based on the relative distance between home and a foreign target country along four dimensions: Cultural Distance Administrative and Political Distance Geographic Distance Economic Distance Most costs and risk involved in expanding are created by distances.

Globalization 3.0 21st Century

MNEs that had been the vanguard of globalization have since become global collaboration networks. Now freely locate business functions anywhere in the world based on optimal mix of costs, capabilities, and PESTEL factors.

Global Strategy

Part of a firm's corporate strategy to gain and sustain a competitive advantage when competing against other foreign and domestic companies around the world

Globalization

Process of closer integration and exchange between different countries and peoples worldwide made possible by falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs. These factors reduce the costs of doing business around the world and opening the doors to a much larger market than any home country. Allows companies to source supplies at a lower costs, learn new competencies, and to differentiate products. Led to significant increases in living standards in many economies around the world

National Competitive Advantage

World leadership in specific industries Has a direct effect on firm level competitive advantage. Companies from home countries that are world leaders in specific industries tend to be the strongest competitors globally

Advantages of Going Global

- Gain access to a larger market - Gain access to low cost input factors - Develop new competencies

Gain access to low cost input factors

Advantages of Going Global MNEs Base their competitive advantage on a low cost leadership strategy are particularly attracted to go oversease to gain access to low cost input factors Raw materials behind globalization 1 and 2: Lumber Iron ore oil coal Globalization 3: Benefit form lower labor costs in manufacturing and services

Develop new competencies

Advantages of Going Global MNEs pursue a global strategy to develop new competencies Attractive for firms that base their competitive advantage on a differentiation strategy. Making foreign direct investments to be part of communities of learning which are often contained in specific geographic regions. Communities of learning - contained in specific regions Location economies

Globalization 1.0 1900-1941

All important business functions were located in their home country. Only sales and distribution operations took place overseas - essentially exporting goods to other markets. Firms procured raw materials from overseas Strategy formulation and implementation, knowledge flows, followed a one path way - domestic headquarters to international outposts. Saw the blossoming of MNEs, ended with US entry into WW2

Death of Distance Hypothesis

Assumption that geographic location alone should not lead to firm level competitive advantage because firms are now more than ever able to source inputs globally

Location Economies

Benefits from locating value chain activities in optimal geographies for a specific activity wherever that may be.

Cultural Distance

CAGE Distance Framework Cultural disparity between the internationally expanding firm's home country and its targeted host country. A firm's decision to enter certain international markets is influenced by cultural differences. Greater cultural distance can increase the cost and uncertainty of conducting business abroad.

Administrative and Political Distance

CAGE Distance Framework Captured in factors such as the absence or presence of: Shared monetary or political associations Political hostilities Weak or strong (the strength of) legal and financial institutions.

Economic Distance

CAGE Distance Framework Wealth per capita income of consumers is the most important determinant of economic distance. Wealthy countries engage in relatively more cross border trade than poorer ones. Rich countries tend to trade with other rich countries; poor countries also trade more with rich countries than with other poor countries Companies from wealthy countries benefit in cross border trade with over wealth countries when their competitive advantage is based on economies of experience, scale, scope, and standardization.

National Culture

Collective mental and emotional "programming of the mind" that differentiates human groups. Culture is made up of a collection of norms and mores, beliefs and values. Culture captures the often unwritten and implicitly understood rules of the game, increases the liability of foreignness.

Born Global

Companies that have their founders start with them with the intent of running global operations. Internet companies

Porter's Diamond Framework

Diamond of competitive advantage Factor Conditions Demand Conditions Competitive intensity in focal industry Related and supporting industries/complementors

How do MNEs enter foreign markets?

Different options managers have when entering foreign markets along with required investments necessary and the control they can exert. Exporting - producing goods in one country to sell in another, oldest forms of internationalization (globalization 1.0) often used to test whether a foreign market is ready for a firm's products.

Liability of Foreignness

Disadvantages of Going Global Additional costs of doing business in an unfamiliar cultural and economic environment, and of coordinating across geographic distances.

Loss of Reputation

Disadvantages of Going Global Most valuable resources that a firm may posses is its reputation. It's reputation can have several dimensions, including a reputation for innovation, customer service, or brand reputation. Globalization a supply chain can have unintended side effects and can lad to a loss of reputation and diminish the MNEs competitiveness. Considerable risk and cost for doing business abroad. Some host governments are either unwilling or unable to enforce regulation and safety codes, MNEs need t rise to the challenge.

Loss of Intellectual property

Disadvantages of Going Global There is an issue of protecting intellectual property in foreign markets Intellectual property exposure Large scale copyright infringement of: Software movie music

Going Global: Why?

Doing so enhances its competitive advantage and that the benefits of globalization exceed the costs. Firms expand beyond their domestic borders if they can increase their economic value creation (C-V) and enhance competitive advantage

Globalization 2.0 1945-2000

End of WW2 Meet the needs that went unfulfilled during the war years but also to reconstruct the damage from the war. MNEs created smaller self contained copies of themselves with all business functions intact Required significant amount of foreign direct investment. It was costly to duplicated overseas, doing so did allow for greater local responsiveness to country specific circumstances. Western European countries Japan Australia

Disadvantages of Going Global

If the cost of going global as captured by the following disadvantages exceeds the expected benefits in terms of value added (C>V). If economic value creation is negative, then firms are better off by expanding internationally. - Liability of Foreignness - Loss of Reputation - Loss of Intellectual property

Multidomestic Strategy

Integration responsiveness framework Strategy pursued by MNEs that attempts to maximize local responsiveness with the intent that local consumers will perceive them to be domestic companies Globalization 2.0 Common in consumer products and food industries Exchange rate exposure Tacit knowledge risk of appropriation

International Strategy

Integration responsiveness framework Strategy that involves leveraging home based core competencies by selling the same products or services in both domestic and foreign markets Oldest type of global strategies (Globalization 1.0) Successfully by MNEs with relatively large domestic markets with strong reputations and brand names. local responsiveness cost reductions

Competitive intensity in focal industry

Porter's Diamond Framework Companies that face a highly competitive environment at home tend to outperform global competitors that lack such intense domestic competition

Factor Conditions

Porter's Diamond Framework Described a country's endowments in terms of natural, human, and other resources. Capital markets, supportive institutional framework, research universities, and public infrastructure

Related and supporting industries/complementors

Porter's Diamond Framework Leadership in related and supporting industries can also foster world class competitors in downstream industries.

Demand Conditions

Porter's Diamond Framework Specific characteristics of demand in a firm's domestic market. Customers in home market hold companies to a high standard of value creation and cost containment contributes to national competitive advantage. Demanding customers may also clue firms in to the latest developments in specific fields and may push firms to move research from basic findings to commercial applications for the marketplace

CAGE, in conclusion

The framework helps determine the attractiveness of foreign target markets in a more fine grained manner based on relative differences, it is a first step A deeper analysis requires looking inside the firm to see strengths and weaknesses work to increase or reduce distance form specific foreign markets.

Local Responsiveness

The need to tailor product and service offerings to fit local consumer preferences and host country requirements Entails higher cost and outweighs cost advantages from economies of scale and lower cost input factors

Globalization Hypothesis

Consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous Based primarily on cost reduction. Lower cost is a key weapon. MNEs attempt to reap significant cost reductions by leveraging economies of scale and by managing global supply chains to access that lowest cost input factors

Transnational Strategy

Integration responsiveness framework Think globally, act locally Strategy that attempts to combine the benefits of a localization strategy (high local responsiveness) with those of a global standardization strategy (lowest cost position attainable) Generally used by MNEs to pursue a blue ocean strategy at the business level by attempting to reconcile and or service differentiations at low cost

Polycentric Innovation Strategy

MNEs now draw on multiple, equally important innovation hubs throughout the world characteristic of Globalization 3.0