1. BUS804 International Business Strategy Lecture 2 Lecturer - Dr. Robert Jack 1-1

2. Internationalisation of the firm’s value chain 2 1-2

3. Learning Objectives How can nations enhance their competitive advantage? Why and how do firms internationalize? How can internationalizing firms gain and sustain competitive advantage? Reference – Chapter 6 of your allocated text 6-3

4. Theories of International Trade and Investment 6-4

5. Theories of International Trade and Investment 6-5

6. Theories of International Trade and Investment 6-6

7. Classical theories Most of the key theories under this category (see pp. 151-156 of your text) maybe familiar to you from economics or international trade subjects: Absolute Advantage Competitive Advantage Factor Proportions Theory For BUS804 we do not intend to go through these in detail 6-7

8. Comparative vs. Competitive Advantage 6-8

9. Critical Role of Innovation in National Economic Success Innovation is a key source of competitive advantage. The firm innovates in four major ways. It can develop: (1)A new product or improve an existing product (2)New ways of manufacturing (3)New ways of marketing (4)New ways of organizing company operations Many innovative firms in a nation leads to national competitive advantage 6-9

10. Critical Role of Productivity in National Economic Success Productivity is the value of the output produced by a unit of labor or capital. It is a key source of competitive advantage for firms. The greater the productivity of the firm, the more efficiently it uses its resources. The greater the aggregate productivity of the firms in a nation, the more efficiently the nation uses its resources. Aggregate productivity is a key determinant of the nation’s standard of living. 6-10

11. Michael Porter’s Diamond Model: Sources of National Competitive Advantage 6-11

12. Factor conditions: Quality and quantity of labor, natural resources, capital, technology, know-how, entrepreneurship, and other factors of production Example An abundance of cost-effective and well-educated workers gives China a competitive advantage in the production of laptop computers. 6-12 The Diamond Model: Sources of National Competitive Advantage (cont.)

13. Related and supporting industries: The presence of suppliers, competitors, and complementary firms that excel within a given industry Example Silicon Valley in California is a great place to launch a computer software firm because it is home to thousands of knowledgeable firms and workers in the software industry. 6-13 The Diamond Model: Sources of National Competitive Advantage (cont.)

14. Demand conditions at home: The strengths and sophistication of customer demand Example Japan is a densely populated, hot, and humid country with very demanding consumers. These conditions led Japan to become one of the leading producers of superior, compact air conditioners. 6-14 The Diamond Model: Sources of National Competitive Advantage (cont.)

15. Firm strategy, structure, and rivalry: The nature of domestic rivalry and the conditions that determine how a nation’s firms are created, organized, and managed Example Italy has many top firms in design industries such as textiles, furniture, lighting, and fashion. Vigorous competitive rivalry puts these firms under constant pressure to innovate, which has propelled Italy to a leading position in design worldwide. 6-15 The Diamond Model: Sources of National Competitive Advantage (cont.)

16. Industrial Cluster A concentration of suppliers and supporting firms from the same industry located within the same geographic area; similar to Porter’s Related and Supporting Industries. A strong cluster can serve as an export platform for the nation. Examples Silicon Valley; pharmaceutical cluster in Switzerland; footwear industry in Pusan, South Korea; IT industry in Bangalore, India; fashion cluster in northern Italy; and Silicon Valley North near Ottawa, Canada 6-16

17. National Industrial Policy A proactive economic development plan employed by the government to nurture or support promising industry sectors with potential for regional or global dominance. Initiatives can include:  Tax incentives  Monetary and fiscal policies  Rigorous educational system  Investment in national infrastructure  Strong legal and regulatory systems 6-17

18. Examples of National Industrial Policy In the 1990s, Vietnam’s government privatized state enterprises and modernized the economy, emphasizing competitive, export-driven industries. Vietnam became one of the fastest-growing economies, averaging around 8 percent annual GDP growth. Singapore adopted pro-business, pro-investment, export-oriented policies, combined with state- directed investments in strategic corporations. The approach stimulated economic growth that averaged 8 percent annually from 1960 to 1999. 6-18

19. Examples of National Industrial Policy (cont.) New Zealand’s government, starting in 1984, transformed the country from an agrarian, protectionist, regulated economy to an industrialized, free-market economy that today competes globally. The Czech government in the 1990s created a business-friendly legal and regulatory environment. The country privatized state-owned companies. Government FDI incentives attracted numerous MNEs, such as Daewoo, ING, Siemens, and Toyota. 6-19

20. Examples of National Industrial Policy (cont.) In the 1990s, Ireland implemented various pro-business policies— fiscal, monetary, tax; investment in education; and emphasis on high- value industries such as pharma and IT—that dramatically grew GDP and reduced unemployment. 6-20

21. International Product Life Cycle Theory Each product and its associated manufacturing technologies go through three stages of evolution: introduction, maturity, and standardization. In the introduction stage, the inventor country enjoys a monopoly both in manufacturing and exports. Example: the television set. 6-21

22. International Product life Cycle Theory (cont.) In the maturity stage, the product’s manufacturing becomes relatively standardized, and other countries start producing and exporting the product. 6-22

23. In the standardization stage, manufacturing ceases in the original innovator country, and this country becomes a net importer of the product. Today, due to globalization, the cycle occurs quickly for many products. International Product life Cycle Theory (cont.) 6-23

24. New Trade Theory Argues that economies of scale are an important factor in some industries for superior international performance, even in the absence of superior comparative advantages. Some industries succeed best as their volume of production increases. Example The commercial aircraft industry has very high fixed costs that necessitate high-volume sales to achieve profitability. 6-24

25. Strategic implications for managers There are at least three main implications for international businesses strategy from these theories: –location implications –first-mover implications –policy implications 6-25

26. Location Different countries have advantages in different productive activities: –these differences influence a firm’s decision about where to locate productive activities –it makes sense for a firm to disperse its various productive activities to those countries where they can be performed most efficiently 6-26

27. First-mover advantages Firms that establish a first-mover advantage in the production of a new product may later dominate global trade in that product: –it can be worthwhile for a firm to invest resources in trying to build first-mover advantages, even if it means losses for a few years before a venture becomes profitable 6-27

28. Government policy Government policies with respect to free trade or protecting domestic industries can significantly impact global competitiveness: –businesses should work to encourage governmental policies that support free trade 6-28

29. The internationalisation process These models evolved during the late 1970s and early 1980s and represented two similar yet distinct processes: –Uppsala Model 1975, 1977, 1990 –Three key academics – Finn Wiedersheim-Paul, Jan Johanson and Jan-Erik Vahlne –Innovation Model 1980 –S. Tamer Cavusgil 6-29

30. Stages in Company Internationalization Innovation Model Domestic Focus 6-30

31. Stages in Company Internationalization Innovation Model Pre-export Stage Domestic Focus 6-31

32. Stages in Company Internationalization Innovation Model Experimental Involvement Pre-export Stage Domestic Focus 6-32

33. Stages in Company Internationalization Innovation Model Experimental Involvement Active Involvement Pre-export Stage Domestic Focus 6-33

34. Stages in Company Internationalization Innovation Model Experimental Involvement Committed Involvement Active Involvement Pre-export Stage Domestic Focus 6-34

35. Stages in Company Internationalization Uppsala Model 6-35 Stage one – no regular export activities Stage two – export via independent representatives Stage three – establishment of an overseas sales subsidiary Stage four – overseas production/manufacturing

36. Stages in Company Internationalization Uppsala Model 6-36 The Uppsala model suggests that international expansion is influenced by managerial learning: Consequently, it proposes that internationalisation begins with low- risk, indirect exporting to markets that are ‘psychically close’ or similar to the firm’s home market: Assumption made is that the obstacle to internationalisation is a lack of market knowledge and resources These obstacles are reduced through incremental decision-making and learning about foreign markets and operations

37. How Firms Gain and Sustain International Competitive Advantage Because the MNE was traditionally the major player in international business, scholars have offered numerous explanations of what makes these firms pursue, and succeed in, internationalization. Because FDI has been MNEs’ main strategy in international expansion, theoretical explanations have tended to emphasize it. 6-37

38. FDI-Based Explanations: Monopolistic Advantage Theory Argues that MNEs prefer FDI because it provides the firm with control over resources and capabilities in the foreign market and a degree of monopoly power relative to foreign competitors. Key sources of monopolistic advantage include proprietary knowledge, patents, unique know-how, and sole ownership of other assets. Example Novartis earns substantial profits by marketing various patent medications through its subsidiaries worldwide. 6-38

39. FDI-Based Explanations: Internalization Theory Explains how the MNE chooses to acquire and retain one or more value-chain activities inside itself. Such “internalization” provides the MNE with greater control over its foreign operations. Internalization avoids the drawbacks of dealing with external partners, such as reduced quality control and the risk of losing proprietary assets to outsiders. Example In China, Intel owns much of its value chain, which ensures that Intel knowledge, patents, and other assets are not misused or illicitly obtained by potential rivals. 6-39

40. FDI-Based Explanations: Dunning’s Eclectic Paradigm Three conditions determine whether or not a company will enter a given foreign country via FDI: 1.Ownership-specific advantages: Knowledge, skills, capabilities, relationships, or physical assets that the firm owns and that are the basis of its competitive advantages 2.Location-specific advantages: Similar to comparative advantages; specific advantages that exist in the country that the MNE has entered, or is seeking to enter, such as natural resources, low-cost labor, or skilled labor 3.Internalization advantages: Control derived from internalizing foreign-based manufacturing, distribution, or other value-chain activities 6-40

41. Example of the Eclectic Paradigm: Sony in China Ownership-Specific Advantages. Sony possesses a huge stock of knowledge and patents in the consumer electronics industry, as represented by products like the Playstation and Vaio laptop. Location-Specific Advantages. Sony desires to manufacture in China in order to take advantage of China’s low-cost, highly knowledgeable labor force. Internalization Advantages. Sony wants to maintain control over its knowledge, patents, manufacturing processes, and quality of its products. Thus, Sony entered China via FDI See Exhibit 6.9 p. 168 for an overview of these 3 key FDI theories 6-41

42. Non-FDI-Based Explanations: International Collaborative Ventures A form of cooperation between two or more firms. Partners pool resources and capabilities to create synergies and share the risk of joint efforts. Starting in the 1980s, firms increasingly began using collaborative ventures to expand abroad. Collaboration provides access to foreign partners’ know-how, capital, distribution channels, and marketing assets. It also helps overcome government-imposed obstacles. 6-42

43. Two Types of International Collaborative Ventures Equity-based joint ventures result in the formation of a new legal entity. In contrast to the wholly owned FDI, the firm collaborates with local partner(s) to reduce risk and commitment of capital. Project-based alliances do not require equity commitment from the partners, but simply a willingness to cooperate in R&D, manufacturing, design, or any other value-adding activity. Because project-based alliances have a narrowly defined scope of activities and timeline, they provide greater flexibility to the firm than equity-based ventures. 6-43