 

Superior features of a country that provide unique

benefits in global competition, typically derived from Distinctive assets or competencies of a firm that are
either natural endowments or deliberate national difficult for competitors to imitate and are typically
policies. derived from specific knowledge, capabilities, skills, or
superior strategies.

Classical Theories It can be beneficial

The belief that national prosperity is for two countriesto trade without barriers as long as
the result of a positive balance of trade, achieved by one is relatively more efficient at producing goods or
maximizing exports and minimizing imports. services neededby the other. What matters is not the
Relative absence of restrictions to absolute cost of production but rather the relative
the flow of goods and services between nations. efficiency withwhich a country can produce the
 product.
A country benefits by producing only those 
products in which it has absolute advantage or that it 
can produce using fewer resources tan another 
country. 
How Can Nations Enhance Their competitive advantage are the competitive
Competitive Advantage? advantage of nations, Michael Porter’s
Diamond model, and national industrial
Contemporary Theories policy.
Three key modern perspectives that help
explain the development of national
1. Firm strategy, structure, and rivalry refer to the particular industries. The resulting Business
nature of domestic rivalry and conditions in a environment is highly supportive for the
nation that determine how firms are created, founding of particular types of firms. Operating
organized, and managed. The presence of strong within a mass of related and supporting
competitors in a nation helps créate and industries provides advantages through
maintain national competitive advantage. information and knowledge synergies,
2. Factor conditions describe the nation’s position in economies of scale and scope, and access to
factors of production, such as labor, natural Appropriate or superior inputs.
resources, capital, technology, entrepreneurship,
and know-how. Consistent 
with factor proportions theory, each nation has a A concentration of businesses, suppliers, and supporting
firms in the same industry at a particular location,
relative abundance of certain factor characterized by a critical mass of human talent, capital, or
endowments, a situation that helps determine other factor endowments.
the nature of its national competitive advantage. 
3. Demand conditions refer to the nature of home- 
A proactiveeconomic developmentplan initiated by thegovernment,
market demand for specific products and
often incollaboration with theprivate sector, that aims todevelop or
services. The strength and sophistication of supportparticular industries withinthe nation.
buyer demand facilitates the development of 
competitive advantages in particular industries. 

The presence of highly demanding customers

pressures firms to innovate faster and produce 
better products. 
4. Related and supporting industries refer to the 
presence of clusters of suppliers, competitors, 

and complementary firms that excel in

 
How Can Internationalizing Firms Gain
and Sustain Competitive Advantage?

FDI-Based Explanations
FDI stock refers to the total value of assets that
MNEs own abroad via their investment
activities.
 cializes in producing certain goods and services and
An explanation of the process by which firms acquire and retain one then trades with other nations to acquire those goods
or more value-chain activities inside the firm, minimizing the
disadvantages of dealing with external partners and allowing for and services in which it is not specialized. Life as we
greater control over foreign operations. know it would be impossible without international
trade.
Monopolistic 
Advantage Theory Classical explanations of international trade began
The firm controls one or more resources, or offers relatively unique
products and services that provide it a degree of monopoly power with mercantilism, which argued that nations should
relative to foreign markets and competitors. seek to maximize their wealth by exporting more than
they import. The absolute advantage principle argues
Dunning’s Eclectic that a country benefits by producing only those products
Paradigm in which it has absolute advantage or can produce using
• Ownership-specific advantages: The firm owns knowledge, skills,
fewer resources tan another country.
capabilities, processes, or physical assets.
• Location-specific advantages: Factors in individ ual countries The principle of comparative advantage contends that
provide specific benefits, such as natural resources, skilled labor, countries should specialize and export those goods in
low-cost labor, and inexpensive capital. which they have a relative advantage compared to other
• Internalization advantages: The firm benefits from internalizing countries. Nations benefit by trading with one another.
foreign manufacturing, distribution, or other value chain activities.
Comparative advantage is based on natural advantages
Non-FDI-Based Explanations and acquired advantages. Competitive advantage derives
A collaborative from distinctive assets or competencies of a firm,
venture is a form of cooperation between two or more such as cost, size, or innovation strengths, which are
firms. There are two major types: (1) equity-based joint difficult for competitors to replicate or imitate. The
ventures that result in the formation of a new legal entity; collective competitive advantages of many firms give
and (2) non-equity-based strategic alliances in which rise to competitive advantage in the nation as a whole.
firms partner temporarily to work on projects related to Factor proportions theory holds that nations specialize in
R&D, design, manufacturing, or any other value-adding the production of goods and services whose factors of
activity. production they hold in abundance. International product
life cycle theory describes how a product may be invented
Networks and relational in one country and eventually mass-produced in other
assets represent the economically beneficial long-term countries, with the innovating country losing its initial
relationships the firm undertakes with other business competitive advantage. New trade theory argues that
entities, such as manufacturers, distributors, suppliers, increasing economies of scale determine superior
retailers, consultants, banks, transportation suppliers, performance in some industries.
governments, and any other organization that can 
provide needed capabilities. 
A major recent contribution to trade theory is

 Porter’s diamond model, which specifies the four

conditions in each nation that give rise to national
In this chapter, you learned about: competitive advantages: firm strategy, structure,

And rivalry; factor conditions; demand conditions;

The basis for trade is specialization. Each nation spe-
And related and supporting industries. An industrial 
cluster is a concentration of companies in the same Low-income countries characterized by limited industrialization and
stagnant economies.
industry in a given location that interact closely with
One another, gaining mutual competitive advantage. 
Competitive advantage of nations describes how nations Former developing economies that have achieved substantial
Acquire international trade advantages by developing industrialization, modernization, and rapid economic growth since
the 1980s.
specific skills, technologies, and industries.
Advanced Economies
National industrial policy refers to efforts by
Advanced economies have democratic, multiparty
governments to direct national resources to developing
systems of government. Their economic systems are
Expertise in specific industries.
usually based on capitalism. They have tremendous

purchasing power, with few restrictions on international
The internationalization process model describes how
trade and investment. They host the world’s largest
companies expand into international business gradually,
usually going from simple exporting to the most MNEs.
committed stage, FDI. Born global firms internationalize
at or near their founding and are part of the emergent Developing Economies
field of international entrepreneurship. Consumers in developing economies have low
 discretionary incomes; the proportion of personal
 income they spend on purchases other than food,
MNEs have value chains that span geographic locations clothing, and housing is very limited. Approximately 17
worldwide. Foreign direct investment means that percent of citizens in developing economies live on less
firms invest at various locations to establish factories, than
marketing subsidiaries, or regional headquarters.
Monopolistic advantage theory describes how companies Emerging Market Economies
succeed internationally by developing resources 
A subset of emerging markets that evolved from centrally planned
and capabilities that few other firms possess.
economies into liberalized markets.
Internalization is the process of acquiring and 
maintaining one or more value-chain activities Transfer of state-owned industries to private concerns.
Inside the firm to minimize the disadvantages of 
Top firms from emerging markets that are fast becoming key
Subcontracting these activities to external firms.
contenders in world markets.
Internalization
theory What Makes Emerging Markets
explains the tendency of MNEs to internalize value- Attractive for International Business
chain stages when it is to their advantage. The eclectic Emerging markets are attractive to internationalizing
paradigm specifies that the international firm should firms as target markets, manufacturing bases, and
possess certain internal competitive advantages, called sourcing destinations.
ownershipspecific advantages, location-specific advantages,
and internalization advantages. Many companies engage Emerging Markets as Target Markets
in international collaborative ventures, interfirm Emerging markets have become important target
partnerships that give them access to assets and other markets for a wide variety of products and services. The
advantages held by foreign partners. MNEs also develop largest ones have doubled their share of world imports
extensive networks of supportive companies such in the last few years. Exports to such countries account
as other manufacturers, distributors, suppliers, retailers, for one-third of total merchandise exports from the
banks, and transportation suppliers. United States. The growing middle class in emerging
markets implies rising demand for various consumer
Advanced Economies, Developing Economies, products, such as electronics and automobiles, and
and Emerging Markets services such as health care.

Post-industrial countries characterized by high percapita income, Emerging Markets as Manufacturing
highly competitive industries, and well-developed comercial Bases These markets are home to low-wage, high-
infrastructure. quality labor for manufacturing and assembly
operations. In addition, some emerging markets have education, government, and hourly jobs; and consume
large reserves of raw materials and natural resources. many discretionary items, including electronics,

Emerging Markets as Sourcing Risks and Challenges of Emerging Markets

Destinations Political Instability
In recent years, companies sought ways of transferring The absence of reliable or consistent governance from
or delegating non-core tasks or operations from in-house recognized government authorities adds to business
groups to specialized contractors. This business trend is costs, increases risks, and reduces managers’ ability to
known as outsourcing—the procurement of selected forecast business conditions. Political instability is
value-adding activities, including production of associated with corruption and weak legal frameworks
intermediate goods or finished products, from that discourage inward investment and the development
independent suppliers or company-owned subsidiaries. of a reliable business environment.
Outsourcing helps foreign firms become more efficient, Weak Intellectual Property Protection
concentrate on their core competencies, and obtain Even when they exist, laws that safeguard intellectual
competitive advantages. When sourcing relies on foreign property rights may not be enforced, or the judicial
suppliers or production bases, it is known as global process may be painfully slow.
sourcing or offshoring Bureaucracy, Red Tape, and Lack of
Transparency
The procurement of selected value-adding activities, Burdensome administrative rules and excessive
including production of intermediate goods or finished products,
requirements for licenses, approvals, and paperwork all
from independent suppliers.
The procurement of products or services from delay business activities. Excessive bureaucracy is
independent suppliers or company-owned subsidiaries located usually associated with lack of transparency, suggesting
abroad for consumption in the home country or a third country. that legal and political systems may not be open and
accountable to the public. Bribery, kickbacks, and
Assessing the True Potential of Emerging extortion, especially in the public sector, cause difficulty
Markets for managers. Where anti-corruption laws are weak,
Unique country conditions such as limited data, managers may be tempted to offer bribes to ensure the
unreliable information, or the high cost of carrying out success of business deals.
market research can make it challenging for Western Poor Physical Infrastructure
firms to estimate the true market potential of emerging In advanced economies, high-quality roads, drainage
markets. Often firms may have to improvise. systems, sewers, and electrical utilities are taken for
To overcome these challenges, in the early stages of granted. However, in emerging markets, such basic
market research, managers examine three important infrastructure is often sorely lacking.
statistics to estimate market potential: per-capita income, Partner Availability and Qualifications
size of the middle class, and market potential indicators. Foreign firms should seek alliances with well-qualified
Per-Capita Income as an Indicator of local companies in countries characterized by
Market Potential inadequate legal and political frameworks. Through
When evaluating the potential of individual markets, such partners, foreign firms can access local market
managers often start by examining aggregate country knowledge, establish supplier and distributor networks,
data, such as gross national income (GNI) or per-capita and develop key government contacts. However,
GDP, expressed in terms of a reference currency such as partners that can provide these advantages are not
the U.S. dollar. always readily available in emerging markets, especially
 smaller ones.

An adjustment for prices that reflects the amount of goods that
Dominance of Family Conglomerates
consumers can buy in their home country, using their own cur- rency Many emerging market economies are dominated by
and consistent with their own standard of living. family-owned rather than publicly owned businesses. A
family conglomerate (FC) is a large, highly diversified
Middle Class as an Indicator of Market company that is privately owned. FCs operate in
Potential industries ranging from banking to construction to
In every country, the middle class represents the manufacturing. They control the majority of economic
segment of people between wealthy and poor. They activity and employment in emerging markets.
have economic independence; work in businesses, 
A large, highly diversified company that is privately owned.
Strategies for Emerging Markets Corporate Social Responsibility in Emerging
Customize Offerings to Unique Emerging Markets and Developing Economies
Market Needs
Successful firms develop a deep understanding of the The most important trends here are fostering
distinctive characteristics of buyers, local suppliers, and economic development with profitable
distribution channels in emerging markets. They build modernization projects and facilitating
good relationships with the communities in which they entrepreneurship through small-scale loans. Such
operate, partly to better understand local conditions and efforts are a form of corporate social responsibility
partly to earn customer respect and loyalty. because they help developing economies grow.
The ability to customize offerings and devise innovative Foster Economic Development with
business models depends largely on the firm’s flexibility Profitable Projects
And entrepreneurial orientation. In emerging markets, Historically, few firms targeted poor countries because
many people are illiterate and fewer than one in four managers assumed there were few profitable
have regular access to the Internet and other computer- opportunities. In reality, if firms market appropriate
based systems. products and employ suitable strategies, they can earn
Consequently, MNEs employ creative approaches to substantial profits in emerging markets and developing
promote their offerings in local markets. Where economies.
suppliers and distribution channels are lacking, they
develop their own infrastructure to obtain requisite raw Microfinance to Facilitate
materials and components or move finished goods to Entrepreneurship
local buyers. Microfinance provides small-scale financial services, such
as “microcredit” and “microloans,” that assist
Partner with Family Conglomerates entrepreneurs to start businesses in poor countries. By
Family conglomerates are key players in their respective taking small loans, frequently less than $100, small-scale
economies and have much capital to invest in new entrepreneurs accumulate sufficient capital to launch
ventures. successful businesses.
Target Governments in Emerging
Markets
In emerging markets and developing economies,
government agencies and state-owned enterprises are an
important customer group for three reasons. First,
governments buy enormous quantities of products (such
as computers, furniture, office supplies, motor vehicles)
And services (such as architectural, legal, and
Consulting services). Second, state enterprises in áreas
like railways, airlines, banking, oil, chemicals, and Steel
buy goods and services from foreign companies. Third,
the public sector influences the procurement activities of
varios private or semi-private corporations.
Construction firms lobby the government to gain
Accessto promising deals to build apartments and
houses for local dwellers. Emerging market
governments regularly announce tenders—formal offers
made by a buyer to purchase certain products or
services. A tenderis also known as a request
for proposals (RFPs).
Formal offers made by a buyer to purchase certain products
or services.