13-02-2023

60 minuti open ended questions and close questions  20 marzo

GOING INTERNATIONAL/MULTINATIONAL: MOTIVATIONS, PROCESSES, EFFECTS

Why do firms enter foreign markets?

- increasing the market share

- reduce the cost of production
- exploit differences in currency and trade at the moment

MAJOR INTERNATIONAL EXPANSION MOTIVATIONS

Traditional motivations:

- Market Seeking: find new customers, develop scale  the company is willing to enter in foreign
countries basically to find new customers, develop scale, to increase the market power.
- Resource Seeking: exploit factor cost differences  which could be raw material, human resources,
technology, land.

Emerging motivations:

- Competitive positioning: Need to compete at a global level to better contrast competitors.

- Global scanning/learning: Access emerging trends, new technologies and best skills worldwide.

Mixed motivations is the most common situation

What does it imply to go international?

- Analyse the market options

- Analyse the business
- Bureaucracy

FIRM INTERNATIONALIZATION: KEY QUESTIONS

Market selection: What markets/countries to enter? (‘where’)

- Analysis of market attractiveness and accessibility

Entry mode: how to enter foreign market?

- Examples: Equity vs nonequity-based mode; alone vs with a partner, greenfield investment vs

acquisitions

Strategic approach: leveraging on local adaptation or pursuing global integration/standardization? Or

both?

Organizational issues: how to coordinate activities on a global basis? How to manage the headquarters-
subsidiary relationship
OUTLINE

1. General framework:
 Defining international business, multinational enterprise (MNE), foreign direct investment
(FDI)
 When and why firms become MNEs
 Major reasons for FDI

2. Drivers, outcomes, and process of internationalization:

 Firm-specific versus location/country-specific advantages
 The impact on performance
 The Internationalization process
 The effects of distance

3. Methodological issues and recent phenomena

 How to measure internationalization
 The “born global” phenomenon

WHAT IS A MULTINATIONAL ENTERPRISE (MNE)?

- A firm having substantial direct investment in foreign countries (NOT just an export business)
- Involved in the active management of these foreign assets (not simply holding them as a passive
financial portfolio)
- Involved in the management of operations located in different countries

A company headquartered in one country but having operations in one or more other countries

(International firm = exporting abroad)

(Multinational firm = firm also having subsidiaries abroad)

WHAT IS DIFFERENT ABOUT MULTINATIONAL MANAGEMENT?

- Multiple operating environments  are complex to manage because they imply:

 Diverse pattern of consumer preferences, channels, legal frameworks, etc.
- Political demands and risks
 Need to mesh corporate strategy with host country policies
- Global competitive game
 Multiple markets, new strategic options
- Currency fluctuation and exchange risk
 Economic performance measured in multiple currencies
- Organizational complexity and diversity
 barriers of distance, time, language and culture
 INTERNATIONAL TRANSACTIONS: TRADE AND INVESTMENT

Trade consists of exports and imports:

- Exports: goods and services produced in one country and then sent to another country
- Imports: goods and services produced in one country and bought in another country

versus

Foreign Investment: consists of companies investing funds to start or acquire operations in another
country.

FOREIGN DIRECT INVESTMENTS

“Direct investment refers to investment that is made to acquire a lasting interest in an enterprise operating
in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the
management of the enterprise”.

International Monetary Fund (IMF) definition

- FDI is the ownership and control of foreign assets.

- FDI usually involves the ownership, whole or partial, of a company in a foreign country  a foreign
subsidiary
- FDI is different from portfolio investment, which is the purchase of financial securities in other firms for
the purpose of realizing a financial gain when these marketable assets are re-sold
- FDI is expensive because a firm must bear the costs of establishing subsidiaries in a foreign country or
of acquiring a foreign enterprise
- FDI is risky because of the problems associated with doing business in another country where culture,
business environment, and the rules of the game may be different (“liability of foreignness”)

WHY DO FIRMS GO MULTINATIONAL?

To build a reputation.

The foreign location provides at the company some advantages that the company cannot obtain in the
home country.

FDI BASED EXPLANATIONS: MONOPOLISTIC ADVANTAGE THEORY

- FDI are driven by the search for (or defence of) competitive advantage
 Competitive advantage is subject to erosion and FDI may represent a way to sustain and renovate a
firm’s competitive advantage over time
- FDI is chosen 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): resource-dependency
reduction
 Key sources of monopolistic advantage include proprietary knowledge, patents, unique know-
how, etc.
 PERSPECTIVE #1 - THE ‘DOMINATING’ MNE: FOCUS ON MARKET POWER

- Firm-specific advantages are necessary conditions for FDI

- Firms choosing to invest abroad must possess some type of firm-specific advantages that are large
enough to overcome the disadvantages compared to host-country firms
- FDIs are associated with firms exploiting assets abroad that other firms do not possess

FDI BASED EXPLANATIONS: INTERNALIZATION THEORY

Internalization theory explains the process by which firms acquire and retain one or more value-chain
activities inside the firm – retaining control over foreign operations and avoiding the disadvantages of
dealing with external partners

- In contrast to arm’s-length (marked-based) entry strategies such as exporting and licensing, which
imply developing contractual relationships with external business partners, FDI provides the firm with
control and ownership of resources
- FDI is driven by organizations’ internal efficiency (hierarchy vs markets)

PERSPECTIVE #2 - THE ‘COORDINATING’ MNE: FOCUS ON EFFICIENC

- The multinational enterprise exists because the firm has internalized markets across country
boundaries
- If the assets involved in the activities that are to be coordinated are knowledge-intensive, the drive for
internalization across borders is strong
- The explanation offered by internalization theory is quite similar to that for vertical integration

FDI BASED EXPLANATIONS: DUNNING’S ECLECTIC PARADIGM (OLI FRAMEWORK)

FDI is driven by heterogeneous forces. Three conditions determine whether a company will make FDIs and
become multinational:

1. Ownership-specific advantages – firm-level knowledge, skills, capabilities, relationships, or physical

assets that form the basis for the firm’s competitive advantage
2. Location-specific advantages – advantages associated with the country in which the MNE has
invested, including natural resources, skilled or low-cost labor, and inexpensive capital
3. Internalization advantages – control derived from internalizing foreign-based manufacturing,
distribution, or other value chain activities (hierarchy vs market)

FDI BASED EXPLANATIONS: DUNNING’S ECLECTIC PARADIGM (OLI FRAMEWORK)

- Firms must have strategic competences or ownership-specific advantages to ‘compensate’ their

unfamiliarity with foreign markets (‘liability of foreignness’)
- Foreign countries must offer location-specific advantages to motivate the company to invest there
- Firms must get better returns from performing activities internally rather than through external market
mechanisms such as contracts and licenses
 PERSPECTIVE #3 - THE ‘KNOWING’ MNE: FOCUS ON VALUE CREATION

Knowledge-based view of the firm:

Each firm represents a set of specific, unique resources, capabilities, processes, organizational routines 
The uniqueness of a firm is tied to intangible resources and human resources, rather than to physical
facilities.

- MNEs develop, transfer, exploit firm-specific, unique resources and capabilities across multiple
locations
- FDIs are made to either exploit a firm-specific advantage or develop one (e.g. tap the knowledge in a
certain country)
- The focus is on capability development/knowledge creation as well as on the issue of transferability of
firm-specific advantages (location-bound vs nonlocation-bound firm-specific advantages

PERSPECTIVE #4 - THE ‘DESIGNING’ MNE: FOCUS ON STRATEGIC FIT

Contingency theory  Focus: Fit organization-environment

 There is no single best way to organize a multinational firm. The way depends on the specific
nature of the environment to which the organization must relate

- Different stages of the internationalization process require different types of organizational structures:
 When the number of products marketed abroad and the proportion of sales abroad are
moderate, having a separate division that is responsible for international affair is sufficient.
 When the internationalization becomes more significant, it is more appropriate to implement a
structure with a global product division or divisions corresponding to geographic areas

PERSPECTIVE # 5 - THE ‘NETWORKING’ MNE: FOCUS ON BUSINESS RELATIONSHIPS

Business network theory focuses on the network of business relationships in which a business actor is
embedded

- A multinational enterprise consists of several business actors (subsidiaries): each subsidiary is

embedded in a specific network, which is more or less distinct from the network of other subsidiaries
 The MNE is active in several business contexts, defined in terms of the business networks in which
the different subsidiaries are embedded
- The MNE is conceived as a ‘differentiated network’: each subsidiary will have its own role which is a
function of its own resource endowment and of the business and institutional environment in which it
is embedded
 MNE NETWORK

PERSPECTIVE # 6 - THE ‘POLITICIZING’ MNE: FOCUS ON POWER AND LEGITIMACY

- The environment of the MNE does not only encompass business issues, but is also a political
environment (MNE as a ‘political’ actor)
- Country differences in terms of legal systems, political institutional context, labour markets, norms,
culture, do impact on the possibility of the firm establishing a sustainable presence in a foreign context
- The MNE is forced to achieve a certain degree of legitimacy in the foreign country, by adapting to the
local institutional environment (governmental bodies, trade unions, media, industry associations, etc.)
- One sign of MNE as a political player is, for example, the creation of organizational units to handle their
relations with the governments, the media, and the general public

The evolution of the international business environment

THE ‘TRIAD’

- In the past most global transactions have traditionally taken place within and between three key
regions: United States (North America), Western Europe, and Japan; these were referred to as: the
‘Triad’ (Ohmae, 1985)
- MNEs from the triad continue to dominate international business, but emerging markets multinational
are becoming increasingly important.

TODAY’S INTERNATIONAL BUSINESS ENVIRONMENT

The international business environment has changed rapidly in recent years as a result of:

- Increased liberalization through trade agreements and the emergence of ‘regional blocs’
- Overall slowdown of triad economies
- Increasing role of emerging countries (China and India overall) – Improvements in technology
- Emergence of international SMEs and born global firms.
 ‘REGIONAL BLOCS’

Geographic areas that consist of two or more countries that agree to pursue economic integration by
reducing tariffs and other restrictions to cross-border flow of products, services, capital and, in more
advanced stages, labor.

Examples: European Union (EU), NAFTA, MERCOSUR, ASEAN, etc

EXAMPLES OF TRADE AGREEMENTS AND (REGIONAL) ECONOMIC INTEGRATION

EUROPEAN UNION – 28 MEMBERS

 LARGEST MULTINATIONAL ENTERPRISES

ITALIAN FIRMS IN THE GLOBAL FORTUNE 500

TOP 10 COUNTRIES WITH THE HIGHEST NUMBER OF MNEs IN FORTUNE GLOBAL 500
 CHANGING NATURE OF MULTINATIONALS

Mini-Multinationals

- Technogym was founded in 1983 near Cesena

- High growth and profitability
- Turnover: 350 millions
- Employees: > 2000

16-02-2023

FROM DUNNING’S ECLECTIC PARADIGM TO THE FSA/CSA FRAMEWORK

CRITIQUES TO DUNNING’S ECLECTIC PARADIGM

The OLI paradigm explains outward FDI suggesting that:

«MNEs develop competitive O advantages at home and then transfer these abroad to specific countries
(depending on L advantages) through FDI, which allows the MNE to internalize the O advantages»
(Rugman, 2010).

This implies that:

 There is a strong connection between O and I advantages (for instance in the case of strategic
alliances) can an O advantage really exist without being owned/internalized by the firm?

 In some cases it is difficult to distinguish between O and L advantages (e.g., when an MNE is given
access to natural resources, L advantages become O advantages).

There is a need to reconcile the OLI framework with internalization theory, which explains why the MNE
will exert proprietary control (ownership) over an intangible, knowledge-based, firm-specific advantage
(FSA).

Which is the main difference?

OLI framework Internalization theory

- Level of analysis: industry (with firm-level - Level of analysis: firm
implications) - Essence: firm-level explanation of FDI,
- Essence: O, L, and I advantages interact to demonstrating the heterogeneity of firm-level
explain the patterns of overseas FDI at industry behavior within any industry
level More analytical and predictive
More descriptive and holistic of FDI motives

INTERNALIZATION THEORY

Firm and country factors are the most relevant elements to analyse an MNE activity.  FSA/CSA framework
 THE CSA/FSA FRAMEWORK

Building blocks of internationalization strategies:

- Firm-specific advantages (FSAs): a unique asset or capability proprietary to the organization, derived
from cost, size, or innovation strengths that are difficult for competitors to replicate or imitate
 Examples: Dell’s extraordinary ability in global supply chain management, Procter & Gamble’s
skill in marketing, Samsung’s leadership in flat-panel TV, Apple’s design leadership

- Country-specific advantages (CSAs): Superior features of a country that provide it with unique benefits
in global competition – derived from either national endowments or deliberate national policies
 Examples: Abundant, low-cost labor in China, Mass of IT workers in India, Huge reserves of
bauxite in Australia, Abundant agricultural land in the USA, Oil in Saudi Arabia

THE CSA/FSA FRAMEWORK: THE MATRIX

Correspond to L
advantages in the OLI
framework

A FOCUS ON FSAs: LOCATION BOUNDEDNESS

Drivers of the location boundedness of an advantage:

A. The nature of the advantage

B. Organizational embeddedness
C. Environmental embeddedness
A. The nature of firm advantage: The first reason why an advantage is difficult to transfer abroad is its
tacit nature  Tacitness of a skill or technique implies non- codifiability, non-teachability and
complexity, which increases the difficulty of knowledge transfer and limits firm expansion.

B. Organisational embeddedness: An advantage is embedded in organisations if it needs to interact with

complementary elements of a specific organisation in order to create economic value. Such
complementary elements may include any activities involving cross-function coordination within the
organisation. For example, a firm’s advantage may reside in its quality control practices, which need to
function with the entire production systems of the firm.

C. Environmental embeddedness: An environmentally embedded advantage must be aligned with specific

environmental/geographical elements, including local partners (e.g. suppliers) and local production-
related factors (e.g. nature resources, labour and raw materials). For instance, a firm’s advantage may
reside in its access to high quality materials from the industry cluster at home. Such an advantage is
closely linked to the firm’s networking ability with local businesses and is deeply embedded in the
home environment.

THE RELATIONSHIP BETWEEN INTERNATIONALIZATION AND PERFORMANCE

EFFECT OF INTERNATIONALIZATION ON PERFORMANCE

Focus on the benefits of internationalization: positive relationship

Explanation: At increasing levels of internationalization, firms can exploit greater economies of scale and
scope, portfolio diversification with positive effects on the risk-return performance + international resource
transfer nurtures the firm’s competitive advantage

Focus on the costs of internationalization: negative relationship

Explanation: At increasing levels of internationalization, there are high information-processing demands,

cultural frictions, increase in governance and transaction costs, greater exposure to financial and political
risks
U-shaped relationship

Explanation: Before the firm reaches a minimum level of internationalization, costs outweigh the benefits
because there is a need to reconfigure internal processes. After, there is a learning processe from going
international, which makes the firm able to exploit the benefits of internationalization (scale, scope, etc.)

Inverted u-shaped relationship

Explanation: After an internationalization threshold, the augmented governance and coordination costs
among the diverse operating units engender escalating managerial challenges and ultimately outweigh the
benefits of international expansion.

SOME CONCLUSIONS ON THE INTERNATIONALIZATION-PERFORMANCE LINK

- Mixed, inconclusive findings

- (Potentially reversed) Causality link: does internationalization affect performance? Or does poor
performance push firms to go international?
- Increasingly less focus on the direct relationship between internationalization and performance and
greater focus on exploring the contigency factors that affect the relationship
 Under what circumstances is the relationship positive or negative?
 What country-, industry-, and firm-level factors change (moderate) the relationship?
- Operationalization issues: how should we measure internationalization?
HOW TO MEASURE INTERNATIONALIZATION?

MEASURING INTERNATIONALIZATION

Internationalization is a multidimensional construct:

 Internationalization has to do with a number of aspects, such as markets served, resources

located abroad, firm management and governance, etc.

 Depth (how deep a firm is international) vs breadth of internationalization (how many

markets/countries)

One single measure is not enough to provide a comprehensive picture of a firm’s internationalization

THE INTERNATIONALIZATION PROFILE OF THE FIRM: DIMENSIONS AND POSSIBILE MEASURES

ASSESSING THE INTERNATIONALIZATION ‘PROFILE’ OF THE FIRM

 ASSESSING THE INTERNATIONALIZATION ‘PROFILE’ OF THE FIRM

 Internationalization from the demand size: most widely used measure of internationalization and
measured by the ratio of foreign sales to total sales.

 Resources located abroad (tangible resources): measured by ratios such as foreign assets to total
assets, overseas subsidiaries to total subsidiaries, and foreign employees to total employment.

 Geographical scope: operationalized by the number of countries or regions in which a firm operates
and by the variance of economic, political, and cultural factors of the different national or regional
environments.

 Internationalization of the business network: affects the range of opportunities a firm can access
and the resources and competencies it can leverage in its international activities.

 International orientation (intangible and human resources): top management's experiential,

motivational, and attitudinal resources deeply affect the internationalization process of a firm.
Measured as the number of managers with international work experience and the ratio of duration
of the top managers’ international assignments to total number of years of work experience.

 Financial internationalization (financial resources): measured by foreign owners (share of foreign

ownership) and foreign debts (as percentage of total debts)

FROM MEASURING INTERNATIONALIZATION TO DESCRIBING INTERNATIONAL STRATEGIES

Several studies offer configurations of international business strategies on the basis of one or more
relevant internationalization dimensions. Examples:

- Perlmutter (1969) typology of MNEs on the basis of managerial mindsets: Ethnocentric,

Polycentric; Geocentric;

- Bartlett and Ghoshal (1989) Integration-Responsiveness Framework: international,

multidomestic, global, transnational

- Rugman and Verbeke (2004) typology of MNEs, grounded on the distinction between
regional and global strategies.

Focus on ‘profiling’, i.e. identifying taxonomies/typologies of international strategies

THE INTERNATIONALIZATION PROCESS

How do firms internationalize?

Do they follow a specific path of overseas expansion?

THE STAGE MODEL OF INTERNATIONALIZATION (‘UPPSALA MODEL’)

The internationalisation process may be explained in terms of two main elements:

(1) Resource commitment

(2) Markets entered

Based on this, the Uppsala model suggests that internationalization occurs with the following steps
(establishment chain):

KEY POINTS OF STAGE MODELS

• Based on the concept of liability of foreignness

• Internationalization is usually gradual and evolutionary

• Slow internationalization results from the uncertainty, lack of knowledge of foreign markets, and
uneasiness that managers have about doing international business

• As its market knowledge increases, a firm enters increasingly distant markets and, within these
markets, it progressively modifies entry modes from exporting to higher-involvement modes such
as alliances and subsidiaries.

• Internationalization is an incremental process based on learning.

 A FOCUS ON THE LIABILITY OF FOREIGNNESS CONCEPT

Liability of foreignness (Zaheer, 1995) indicates the COST OF DOING BUSINESS ABROAD and results in a
competitive disadvantage for the MNE relative to the local competitors in the foreign location.

Four sources of liability of foreignness:

(1) costs directly associated with spatial distance, such as the costs of travel, transportation, and
coordination over distance and across time zones;

(2) firm-specific costs based on a particular company's unfamiliarity with and lack of roots in a local
environment;

(3) costs resulting from the host country environment, such as the lack of legitimacy of foreign firms
and economic nationalism;

(4) costs from the home country environment, such as the restrictions

As a consequence:

 Liability of foreignness is strongly connected with a liability of outsidership and a liability of

newness;

 The relative importance of these costs will vary by industry, firm, host country, and home country;

 Whatever its source, the liability of foreignness implies that foreign firms will have lower
profitability than local firms.

However, liability of foreignness is not a static cost and rather changes as a function of a firm’s
experience in the target market

 the more the firm consolidates its presence in the host country, the more it gains Knowledge,
and the more it closes the gap relative to the local competitors

THE IMPORTANCE OF ‘PSYCHIC’ DISTANCE

The pattern and sequence with which firms enter foreign markets depend on their ‘psychic distance’.

Psychic distance refers to the “individual’s perception of the differences between the home country and the
foreign country that shapes the psychic distance concept» (Sousa & Bradley, 2008).

Gap in cultural understanding between countries, due to factors such as language, levels of education,
culture, customs and the legal and commercial systems.

 Firms will begin their international activities in countries which are ‘psychically closer’.

– Countries can be geographically close but ‘psychically distant’

– e.g. UK ‘psychically close’ to US and Australia; Spain close to Brazil.

 CRITICISMS TO THE STAGE MODEL OF INTERNATIONALIZATION

• Too rigid: firms may jump one or more of the stages

• It looks at internationalization only from the market side (sales)

• Is this approach relevant to the service sector?

– Services are generally thought to be non-tradable.

• Firms increasingly leverage on network relationships when going international:

– network theory focuses on the firm’s business context/network whereas the stage model
focuses on the characteristics of the individual firm

• International strategies of emerging market MNEs differ from those of ‘traditional’ MNEs (Guillen
and Garcia-Canal, 2009)

– Accelerated internationalization

– Simultaneous entry in multiple (developed and emerging) countries

– Strong focus on external growth (acquisitions and alliances)

• Empirical evidence on ‘born global’ firms (or ‘international new ventures’)

‘BORN GLOBAL’ FIRMS OR INTERNATIONAL NEW VENTURES

Born global firm: a young entrepreneurial company that initiates international business activity very early in
its evolution, moving rapidly into foreign markets.

Key characteristics of born globals:

 Early, rapid, and substantial internationalization

 Fewer financial and other resources than traditional MNEs

 Often formed by strong entrepreneurs

 Often technically superior in a given product category

 Tend to leverage on networks.

 Heavy use of information and communications technologies

More and more firms, even young, small ones, have operations that bridge national borders
 20-02-2023

THE ROLE OF DISTANCE IN THE INTERNATIONALIZATION PROCESS

WHY DO COUNTRIES DIFFER?  landscape, geography, culture, religion, economic/institutional

development

Distance  cross-country contextual differences, which have an impact on firms’ strategies, management
practices, and organizational outcomes.

Distance is a key element in international business  “essentially, international management is the

management of distance” (Zaheer, 2012).

Over time, multiple conceptualizations of distance have been developed (e.g., psychic distance, CAGE
framework, institutional distance, etc

THE FOUR DIMENSIONS OF DISTANCE: THE ‘CAGE’ FRAMEWORK

- Distance is the main source of complexity in international expansion

- Distance exists not only in geographical, but also in cultural, administrative and economic
dimension
- The importance of each of these dimensions varies across industries and countries involved in the
pathways of foreign expansion
- The cultural, administrative, geographic and economic (CAGE) distance framework helps managers
identify and assess the impact of distance at country and industry level

THE CAGE DISTANCE FRAMEWORK (country level)

Distance between 2 countries can be assessed in terms of:

 THE CAGE DISTANCE FRAMEWORK (industry level)

APPLICATION OF THE CAGE FRAMEWORK

- At the country-level  Make key differences across countries visible and identify the differences
that might handicap multinational companies relative to local competitors

- At the industry-level  Provide a summary of the characteristics that are likely to make an industry
sensitive to a particular kind of distance

APPLICATION AT THE COUNTRY LEVEL

- Identify 2 countries and assess their distance (high – medium – low) using the CAGE framework
- Italy and China:

Dimension Item/factors Assessment (high-medium-low)

Cultural Medium to High
Administrative Medium to High
Geographic Medium to High
Economic Medium to High

APPLICATION AT THE INDUSTRY LEVEL

- Choose an industry and assess the relevance (High – Medium – Low) of each dimension of distance
(i.e., to what extent the industry is sensitive to each dimension of distance)
- Agriculture

Dimension Assessment (high-medium-low)

Cultural
Administrative
Geographic
Economic
 FOCUS ON CULTURAL DISTANCE

Cultural distance has been extensively explored in IB studies.

The concept of cultural distance is commonly applied at the national level and it can be defined as the
degree to which the cultural norms in one country are different from those in another country.

Most common approaches to the exploration of cultural distance:

 Hofstede cultural dimensions à Kogut & Singh (1988) composite index of distance
 GLOBE project (2004)

HOFSTEDE CULTURAL DIMENSIONS  https://hi.hofstede-insights.com/national-culture

 Power distance index  «degree to which the less powerful members of a society accept and
expect that power is distributed unequally»

 Individualism versus collectivism  Whether individuals are expected to take care of only
themselves and their immediate families or if they can expect their relatives or members of a
particular ingroup to look after them

 Masculinity versus femininity  «preference for achievement, heroism, assertiveness, and material
rewards for success (masculinity) or for cooperation, modesty, caring for the weak and quality of
life (femininity)

 Uncertainty avoidance index  «degree to which the members of a society feel uncomfortable
with uncertainty and ambiguity»

 Long-term versus short-term orientation  preference for maintaining time-honoured traditions

and norms (short-term) or for encouraging changes (long-term)

 Indulgence versus restraint  «(…)society that allows relatively free gratification of basic and
natural human drives related to enjoying life and having fun. Restraint stands for a society that
suppresses gratification of needs and regulates it by means of strict social norms»

GLOBE PROJECT (House et al., 2004)  https://globeproject.com/study_2004_2007#data

Nine dimensions:

- power distance
- uncertainty avoidance
- performance orientation
- assertiveness
- future orientation
- human orientation
- institutional collectivism
- in-group collectivism
- gender egalitarianism

Most common measure of cultural distance: Kogut & Singh (1988) composite index
Where:

- CD is the distance between the j host country and the home country,
- Iij is the index of the ith dimension for the host country j,
- Iih is the ith dimension index of the home country, and
- Vi is the variance of the index in the ith dimension.

CRITICISMS TO CULTURAL DISTANCE

CONCEPTUAL CRITICISMS:

 Illusion of symmetry: "Distance", by definition, is symmetric: The distance from point A to point B is
identical to the distance from point B to point A. However, this is difficult in the context of FDI (e.g.
An Italian firm investing in China may not face the same challenges as a Chinese firm investing in
Italy).
 Illusion of stability: CD is assumed to be constant over time.
 Illusion of linearity: assumption of linear impact on investment, entry mode and performance.
 Illusion of causality: assumption that CD has a causal effect on FDI pattern, sequence and
performance (other distances may be relevant to FDI).
 Illusion of discordance: assumption that differences in cultures produce lack of "fit" and hence an
obstacle to transaction à not every cultural gap is critical to performance

METHODOLOGICAL CRITICISMS:

 Assumption of corporate homogeneity: Lack of distinction among corporate cultures of firms

belonging to the same national context
 Corporate culture can shape the behaviors associated with a national culture
 Assumption of spatial homogeneity: The CD index assumes homogeneity of cultures within a given
nation

LINKAGE CULTURAL DISTANCE-PSYCHIC DISTANCE

 FOCUS ON INSTITUTIONAL DISTANCE

The origins of the concept of institutional distance dates back to 1990s.

Defined as “the difference between the institutional profiles of two countries, typically the home and the
host country of an MNC” (Kostova, 1996).

Theoretical underpinning: institutional theory  study of the embeddedness of organizations in

institutional contexts.

Institutional distance is a broad concept that encompasses not only cultural aspects but also regulatory and
cognitive dimensions.

Central idea in institutional distance research:  «companies doing business across national borders are
embedded and exposed to multiple and different institutional environments in their home and host
countries, and, as a result, face unique difficulties and risks (Kostova, 1999). The extent of such differences
(i.e., institutional distance) determines the specific challenges faced in each set of conditions and affects
companies’ strategic and managerial decisions and actions» (Kostova et al., 2020).

Two main approaches to the study of institutional distance:

1) Organizational institutionalism
Institutions are social structures composed by three pillars that determine the legitimacy
requirements and expectations:
 Regulatory (rules and laws that exist to ensure stability and order in societies)
 Cultural-cognitive (established cognitive structures in society that are taken for granted)
 Normative (domain of social values, cultures, and norms)

2) Institutional economics
Institutions are responsible for structuring human interactions based on:
 Formal institutions (rules, laws, constitutions)
 Informal institutions (norms of behaviour, conventions, and codes of conduct)

The two approaches to institutional distance explain in different ways the mechanism through which
institutional distance increases the cost of doing business abroad:
In terms of operationalization of institutional distance, multiple sources and measures may be used:
https://link.springer.com/article/10.1057/s41267-019-00294-w/tables/3

Main findings:

1. Subsidiary performance Institutional distance generally has a negative effect on firm performance.
2. Subsidiary survival Institutional distance decreases the chances of subsidiary survival
3. Entry modes
- overall negative and significant relationship between institutional distance and entry mode.
Greater institutional distance is associated with lower commitment in terms of degree of
ownership
- no significant relationship between institutional distance and establishment mode
(acquisition vs. greenfield)
 23-02-2023

INDUSTRY GLOBALIZATION AND INTERNATIONAL BUSINESS STRATEGIES

GLOBALIZATION AND FIRM STRATEGIES

A good strategy is based on a good ‘fit’ with the external (industry) environment

Industries do differ in terms of globalization potential

COMPETITIVE PRESSURES

Firms that compete in the global marketplace typically face two types of competitive pressure

- Pressures for cost reductions (deriving from global competition): they can be assessed by
applying the 5 forces model  pressure for efficiency and depend on the competition in
the industry
- Pressures to be locally responsive (differentiating products, services, and marketing from
country to country)  pressure for local adaptation means companies competing globally
or also exposed in specific industry to the need to adapt the local condition, demand

PRESSURES FOR COST REDUCTIONS (global integration)

It states that when we analyse competition, we cannot simply look at incumbents/direct competitors which
are in the middle of the model, we need to take in extended perspective and include additional sources
(horizontal or vertical) of competition.

The first need we have to consider is the number of companies in an industry.

If an industry is:

o Concentrated  lower number of big companies

o Fragmented  bigger number of smaller firms

In which of the 2 situations do you expect a greater competition?  fragmentation

So, the number of players makes a different in terms of competitive dynamics

The second key driver is the nature of competition. If the competition is based on price, the situation goes
to the benefits of customers but goes to the detriment of companies/competitors.

When the forces of competition are intense, pressures for cost reduction are also higher.

Pressures for cost reductions are intense:

- In industries producing commodity-type products (price is the main competitive weapon:

e.g., petroleum, steel, sugar)
- In industries where major competitors are based in low-cost locations
- Where there is persistent excess capacity
- Where consumers are powerful and face low switching costs

The liberalization of the world trade and investment environment has generally increased cost pressure in
each industry.

These pressures are strong in global industries, in which:

 Firms (re)define their value chain on a worldwide basis and coordinate their activities across many
countries in order to maximize efficiency, flexibility, and learning.
 Concentrate manufacturing in a few selected locations to achieve economies of scale
 Capitalize on converging consumer trends and universal needs (companies such as Nike, Dell, ING,
and Coca-Cola offer products that appeal to customers everywhere).
 Leverage on global sourcing of raw materials, components, and labor from large-scale, centralized
suppliers
 Take advantage of the availability of media that reaches customers in multiple markets (Internet
and cross-national television) to promote offerings in many countries simultaneously.

Global integration promotes the reduction of wasteful duplication (‘redundancy’) across the firm’s
operations worldwide.

PRESSURES FOR LOCAL RESPONSIVENESS  we have adaptation

They can be assessed by considering the following factors:

 Differences in consumer tastes & preferences (e.g., North American families like pickup trucks while
in Europe they are viewed as a utility vehicle for firms; products in the food and furniture industries
require much adaptation)
 Cultural differences: For products where cultural differences are important (such as books and
kitchen appliances), products and marketing need to be substantially adapted
 Differences in infrastructure & traditional practices (e.g., Consumer electrical system in North
America is based on 110 volts, in Europe on 240 volts; In Britain, people drive on the left side of the
road)
 Differences in Distribution Channels (e.g., Germany has few retailers dominating the food market,
while in Italy it is fragmented)
 Local competition. Where many local rivals are present, it is best to offer carefully adapted
products and have a local presence to maximize knowledge of competitors
 Host-Government Demands (e.g., Health care system differences between countries require
pharmaceutical firms to change operating procedures: testing, registration, pricing)
Those industries are strong in multidomestic industries, in which firms attempt to meet the specific needs
of buyers in individual countries, as well as adapt to the local competitive environment and distribution
structure.

Although most firms prefer a global integration approach, some degree of local responsiveness is necessary
due to differences in individual markets.

For example, given distinctive local conditions, Wal-Mart store managers in Mexico had to adjust store
hours, the merchandise mix, marketing approaches, and employee training.

INTEGRATION-RESPONSIVENESS FRAMEWORK: COMPETING PRESSURES ON THE INTERNATIONALIZING

FIRM

If we combine these 2 pressures, we may identify 2 opposite and contrasting families of needs. In
combining these 2 pressures we get to this framework, which is the framework that we use to identify the
potential alternatives in terms of international business strategies.

MULTIDOMESTIC AND GLOBAL INDUSTRIES

o Multidomestic industries.  Firms apply a country-by-country approach to product development

and marketing, as dictated by specific needs, tastes, laws, and economic situation. Competition is
on a country-by country basis. E.g., food and beverage, consumer products, clothing and fashion
industries.
o Global industries.  Firms develop products and marketing appropriate for an entire region or for
the world. Competition takes place on a regional or worldwide scale. E.g., aerospace, automobiles,
telecommunications, computers, chemicals, and industrial equipment industries
 MULTINATIONAL, INTERNATIONAL, GLOBAL, AND TRANSATIONAL STRATEGIES

CHOOSING A STRATEGY

 Multinational corporations are called to decide ….

- To what extent activities are to be dispersed around the globe (e.g. one production center
or several?)
- To what extent products are to be customized for different markets (e.g. one standardized
product or several customized products?)
 Given the pressures (high or low) for global integration and local responsiveness, four are the
possible international strategies
 Each of them is the most suitable for a specific competitive situation

FOUR DISTINCT STRATEGIES EMERGING FROM THE INTEGRATION-RESPONSIVENESS FRAMEWORK

Here we have a metric of international strategies that is based on the integration responsiveness
framework. These metrics combine pressures for cost reduction with pressures for local responsiveness
which could be either weak or strong.

Weak pressures for cost reduction – weak pressures for local responsiveness  International strategy
(home replication strategy  replication of the strategy that is used in the domestic market)

o Products are designed with domestic customers in mind, i.e., not adapted for foreign markets
(product development functions centralized at home)
o Firms centralize product development functions at home and establish manufacturing and
marketing functions in local country but headquarters exercises tight control over it
o Sometimes based on simple exporting
o The firm views international business as separate from, and secondary to, its domestic busines s
o Limit customization of product offering and market strategy
- Effective strategy if firm faces weak pressures for local responsiveness and cost reductions
 - The need satisfied should be universal and competition low (e.g Xerox, in the 60s, when
invented the photocopying technology)

Treats overseas units as offshoots of domestic strategy

Weak pressures for cost reduction – strong pressures for local responsiveness  multidomestic strategy
(multi-local strategy)  local adaptation is the key for success

o Main aim is maximum local responsiveness

o Firms customize product offering, marketing mix and operations including production and R&D
according to national conditions
o Headquarters delegates much autonomy to each country manager, allowing him/her to operate
independently.
o Local (country) managers substantially adapt products and practices to suit local conditions, but
have little incentive to share knowledge with managers elsewhere.
o The firm results in a collection of disconnected markets, with no coordination/integration
o High cost structure (Companies are generally unable to realize value from experience curve effects
and location economies)

Treats the world as a portfolio of national opportunities

Strong pressures for cost reduction – weak pressures for local responsiveness  global strategy

Approach: Viewing the world as just one single enormous strategic business unit

o Production, marketing, and R&D concentrated in few favourable functions

o Headquarters pursues global integration, seeking to control country operations in order to
minimize duplication, and maximize efficiency
o The firm offers a standardized product to keep costs low
o Effective where strong pressures for cost reductions and low demand for local responsiveness exist
- Semiconductor industry

Treats the world as a single integrated strategic unit

Strong pressures for cost reduction – strong pressures for local responsiveness  transnational strategy

o Firms aim to reduce costs while paying attention to pressures for local responsiveness
o Transnational strategy is difficult to implement because of contradictory demands placed on the
organization (balance between global and multidomestic strategies)
o Transnational strategy builds on the model ‘standardize whenever possible; adapt when necessary
GLOBAL INTEGRATION versus LOCAL ADAPTATION

We need to take into account that companies are not monolithic entities, they are composed by functions,
organizational units and each function has different tasks.

Even though we tent to associate pressures for global integration and pressures for local responsiveness to
specific industries.

Within the same industry firms may responding different ways to these pressures.

Toyota has implemented a global strategy

Fiat responds to the local conditions

Pressures are differently and variously interpreted within the same industry by different companies.

THE TRANSNATIONAL STRATEGY OF IKEA

 Some 90% of the product line is identical across more than two dozen countries. IKEA modifies
some of its furniture to suit individual countries.
 IKEA’s marketing is centrally developed at company headquarters, but implemented with local
adjustments (e.g., to suit language differences in catalogs).

Examples: Mc Donal’s, Lamborghini

Product level strategy  business strategy, that could be either differentiation of the product or the cost
leadership

Business level strategy  entirely take place around the product

Here the focus is how this is treated on the international landscape.

Example  If Lamborghini made different types of adaptation based on the different countries while at the
same time maintaining global integration approach to cost reduction then that would be a transnational
strategy.

27-02-2023

FOREIGN MARKET ENTRY MODES

International transactions that involve the exchange of products: Home based international trade
activities such as exporting and global sourcing.

Contractual relationships: Include licensing and franchising.

Equity or ownership-based international business activities: include FDI and equity-based collaborative
ventures.

A CLASSIFICATION OF FOREIGN MARKET ENTRY STRATEGIES BASED ON FIRM DEGREE OF CONTROL

Of course, depending on the type of entry strategy we will end up having:

- Different levels of control

- Different levels of resource (financial+) commitment
- Different levels of flexibility
- Different levels of risk

CHOICE OF ENTRY MODES

Whenever we think of foreign entry mode, one of the mostly used approach is thinking about this decision
as a sort of hierarchical tree of decisions: where companies take decisions based on subsequent step. So,
the first decision is choosing whether the company wants to enter in the foreign location through equity or
non-equity modes.
EXPORTING

The firm manufactures in one country (usually the home country) and conducts marketing, distribution, and
customer service activities in a foreign export market.

Export channels:

- Independent distributor or agent (indirect export)

- Firm’s direct contact with foreign market through its own sales’ people

Popular among SMEs

ADVANTAGES OF EXPORTING

 Increase sales and diversify customer base, reducing dependence on the home market
 Stabilize fluctuations in sales associated with economic cycles or seasonality
 Avoid cost of establishing manufacturing operations
 Low-cost entry strategy
 Minimal risk
 Maximal flexibility

DISADVANTAGES OF EXPORTING

 Sensitive to tariffs and other trade barriers

 Sensitive to exchange rate fluctuations
 Possible high transportation costs
 Compared to FDI, firm has fewer opportunities to learn about customers, competitors, and the
marketplace
 Possible lack of control over marketing representatives (especially if multi-brand)
LICENSING, FRANCHISING AND OTHER CONTRACTUAL STRATEGIES

TWO TYPES OF CONTRACTUAL RELATIONSHIPS

a. Licensing: an arrangement in which the owner of intellectual property (“licensor”) grants another
firm the right to use that property for a specified period of time in exchange for royalties or other
compensation.
- Intangible properties include patents, inventions, formulas, copyrights and trademarks
b. Franchising: an arrangement in which the firm allows another the right to use an entire business
system in exchange for fees, royalties or other compensation.
- More comprehensive and generally longer-term than licensing.

ADVANTAGES OF LICENSING

 Reduces development costs and risks of establishing foreign enterprise

 Low capital risk and low commitment of resources
 Suitable if markets are unfamiliar or politically risky
 Overcomes restrictive investment barriers

DISADVANTAGES OF LICENSING

 Licensor has limited control over its asset(s) abroad

 Risk of loss of control of the licensor over activities and technology
 Risk of creating a future competitor

FRANCHISING

 The franchisor transfers to the franchisee a total business method, including production and
marketing methods, sales systems, procedures, training, and the use of its name.
 The franchisor:
- assists the franchisee in doing business
- Insists that the franchisee agree to follow strict rules
- receives royalties

THE ROLE OF THE FRANCHISOR AND THE FRANCHISEE

Franchisor:

o provides strategic assets

o has know-how about its own industry

Advantages Disadvantages
Quick and cost-effective entry into numerous Control over franchisee may be difficult
foreign markets
No need to invest substantial capital Conflicts with franchisee are likely
The firm can leverage franchisees’ knowledge of Preserving franchisor’s image in the foreign market
local market and business environment may be challenging
Franchisee:

o has entrepreneurial drive, deep knowledge about the local market and how to run a business there.

Advantages Disadvantages
Gain a well-known brand name Initial investment or royalty payment may be
substantial
Acquire training and know-how; receive ongoing Franchisee is required to purchase supplies,
support from the franchisor equipment, and products from the franchisor only
Become part of an established international The franchisor holds superior bargaining power
network
Operate an independent business Franchisor may impose inappropriate technical or
managerial systems on the franchisee

SAFEGUARDING INTELLECTUAL PROPERTY

Contractual arrangements provide only moderate control over foreign partners.

Laws that govern contractual relations are often insufficient abroad.

Thus, it is critical to:

 Have a good contract;

 Develop close, trusting relationships with foreign partners;

Not only franchising and licensing… the term “strategic alliance” is widely used to describe a variety of
interfirm cooperative agreements.

WHAT IS A STRATEGIC ALLIANCE?

 A mutually agreed collaboration between companies

 The partners pool, exchange or integrate specific business resources to achieve a common goal
 Yet they remain separate businesses, making alliances distinct from mergers and acquisitions

THE IMPLICATIONS OF ESTABLISHING STRATEGIC ALLIANCES

THE BASIC DISTINCTION IS BETWEEN NON-EQUITY AND EQUITY ALLIANCES

Advantages Disadvantages
Equity alliances - Greater control over future directions - Complex management structure
(e.g. joint ventures) - Easier transfer of knowledge between - Difficult to terminate
partners - Greater risk
- Greater commitment to the success of
the partnership
Non-equity alliances - Easy to set up - Knowledge transfer may be less
- Simple management structure straightforward between partners
- Can respond quickly to changing - Lower commitment
technology and market conditions
- Easy to terminate

INTERNATIONAL JOINT VENTURES

Establishing a firm that is jointly owned by two or more independent firms

ADVANTAGES:

 Local partner knowledge of the host country market

 Sharing costs and risks
 Avoiding local government aversion

RISKS ARISING FROM ALLIANCES

– Poor contract
– Failure to make complementary resources available
– Misappropriation of resources and capabilities
– Being held hostage through specific investments

FOUR LEVERS FOR INCREASING THE PROBABILITY OF ALLIANCE SUCCESS

 Understand the determinants of trust

 Be able to manage knowledge and learning
 Understand alliance evolution
 Know how to measure alliance performance

INTERNATIONAL JOINT VENTURE CHECKLIST  overview of which are the typical steps that should be taken
into consideration when entry an international joint venture

1. Test the strategic logic  the investment thesis.

- Do you really need a partner? For how long? Does your partner?
- How big is the payoff for both parties? How likely is success?
- Is a joint venture the best option?
- Ensure congruent performance measures exist.
 2. Partnership and fit.
- Does the partner share your objectives for the venture?
- Does the partner have the necessary skills and resources? Will you get access to them?
- Will you be compatible?

3. Shape and design.

- Define the venture’s scope of activity and its strategic freedom vis-à-vis its parents.
- Ensure that partners’ contributions are balanced.
- Establish the managerial role of each partner.

SCOPE OF ACTIVITY

CONTROL IN JOINT VENTURES

Two types:

A. One parent dominates the venture’s decision making (…but is this a “joint” venture?)
B. Parents are both involved in decision making
- shared  both companies are involved in the keys decision making bodies and corporate
governance. Both companies have members for example in the board of directors of the
venture and based on this they control various functions and activities performed by the
venture  the 2 parents take decision together on all operations
- split  both companies contribute to the board in the venture, however both of them have
clear decision making roles and responsibilities on various functions and activities.  the 2
parents have divided decision making area.

Shared control Split control

 4. Making the venture work
- Give the venture continuing top management attention.
- Manage cultural differences.
- Watch out for inequities.
- Be flexible.
- Trust matters more than “paper” and contracts
- Agree on an endgame.

WHOLLY OWNED SUBSIDIARY (100% owned by the host parent)

Advantages:

 No risk of losing technical competence to a competitor

 Tight control of operations
 Realize learning curve and location economies

Disadvantage:  Bear full cost and risk

Subsidiaries could be greenfield investments or acquisitions

GREENFIELD INVESTMENT VS M&A

Greenfield investment: firm invests to build a new manufacturing, marketing or administrative facility, as
opposed to acquiring existing facilities.

Acquisition: purchase/adquire an existing company or facility.

Merger: special type of acquisition in which two firms join to form a new, larger company.

GREENFIELD INVESTMENTS: ADVANTAGES AND DISADVANTAGES

Advantages Disadvantages
The MNE can build the subsidiary it wants Slow to establish
Allows a gradual approach Risky
Relevant efforts to consolidate in the foreign
market
Preemption by aggressive competitors

ACQUISITIONS: ADVANTAGES AND DISADVANTAGES

Advantages Disadvantages
Quick to execute Culture clash and difficulties in the stage of
integration post-acquisition
Pre-empt competitors Problems with proposed synergies
Greater certainty about time and costs of the Need for a careful due diligence and much
investments information about the target firm
 Possibly less risky Overpay for firm
Easier adaptation to local environment
06-03-2023

Related business, acquisition is basically much easier because you have no limitation in terms of resources.

WHAT FACTORS AFFECT THE GREENFIELD VS ACQUISITIONS DECISION?

Variable Expected effect on the likelihood of acquisition

R&D intensity ?
Cultural distance ?
International experience ?

Is there a relationship between international business strategy (global vs multidomestic) and the choice
between greenfield investment and acquisition?

THE CHOICE BETWEEN GREENFIELD INVESTMENT AND ACQUISITION?

Is there a relationship between international strategy (global vs multidomestic) and the choice between
greenfield investment and acquisition?

GLOBAL STRATEGY

 National markets are highly interconnected

 Focus on efficiency and economies of scale and scope
 High product standardization
 Focus on non-location bound firm-specific advantages (e.g. technology)
 Subsidiaries are implementors of the strategies developed at headquarters’ level and mainly exploit
parent company competitive advantages the best way to realize this kind of international
business strategy is through greenfield investment

MULTIDOMESTIC STRATEGY

 Each market is a quite independent competitive arena

 Focus on local responsiveness and adaptation to the requirements and specificities of local markets
 Focus on location bound firm-specific advantages
 Subsidiaries enjoy greater autonomy and the strategic decision making process is characterized by
a greater decentralisation at subsidiary level  acquiring a subsidiary that is already embedded in
that location is the best choice

GLOBAL AND MULTIDOMESTIC STRATEGIES AND THE CHOICE BETWEEN GREENFIELD AND ACQUISITIONS
(Harzing, 2002)
They connected the type of pressure towards globalization at the industry level with the most suitable
entry mode given the international business strategy. They said if you have in the industry pressure for
global integration the best way to realize that strategy are greenfield investments because you can
centralize everything.

In case of a multidomestic strategy where the needs for a local responsiveness is the greatest then
acquisitions are the best way because MNEs are acquiring something that already exist.

Change also the relationship that we can established between the headquarters and the subsidiary because
also this make the difference.

In a greenfield investment, potentially, the level of control that the headquarter need to exercise on the
subsidiary would be higher. While in an acquisition, the level of control is maybe lower; the autonomy that
we can give from an organization point of view to the local subsidiary maybe higher.

We talk about the reliance on expatriates, this being managers that are sent to the foreign subsidiaries
through international assignment to establish a number of operations.

Expatriates would be more needed in greenfield investments because the subsidiary need to be established
as a brand-new entity.

Therefore the extent of autonomy, local initiatives that may be done in a greenfield investment are really
lower relative to a MNE because the overall level of autonomy of the subsidiaries is lower.

In an acquisition we need to reach exactly the opposite objective that is of maximizing the potential for
adapting to the local context. To do this, relying on local managers rather than expatriates is the best
choice.

There is a connection between the type of international strategy and the entry mode that best suites that
international business strategy.
 13-03-2023

MULTINATIONAL CORPORATIONS’ ORGANIZATIONAL MODELS

I. DIMENSIONS OF THE ORGANIZATION DESIGN:

A SET OF INTERDEPENDENT COMPONENTS

THE ORGANIZATION “ANATOMY”

STRUCTURE: Elements of differentiation and integration of corporate resources. Formalizes power

distribution in the organization.

 Vertical differentiation/integration: number of hierarchical layers

 Horizontal differentiation/integration (grouping): organization of resources, people and activities by
strategic axes: business, functions, geography, customers, technology.

THE ORGANIZATION  “PHYSIOLOGY”

PROCESSES & SYSTEMS: various transversal mechanisms of coordination, integration, control and resource
distribution
  Formalization: how and to what extent procedures are defined and written
 Centralization: level of power concentration at given or determined levels of the firm
 Vertical processes: Planning, budgeting
 Horizontal mechanisms: committees, tasks force, cross-function and cross –geographic project
management teams
 ICT systems

THE ORGANIZATION (CONT’D)  PSYCHOLOGY”

CULTURE: beliefs and values shared by organization members and which constitute the informal aspect of
the organization design

NORMATIVE INTEGRATION: socialization processes including HRM processes:

- Personnel and expatriate rotations

- Incentives and rewards
- Internal communication
- Career-path management
- Training and development programs

II. IMPLEMENTING THE INTERNATIONAL STRATEGY: CHOOSING THE APPROPRIATE FORMAL STRUCTURE

CONTINGENCY THEORY: ALIGNMENT OF STRATEGY AND STRUCTURE

1. Early-stage Structure: The Functional ‘Export’ Structure

  The functional structure fits weakly product-diversified companies (Examples: General Motors,
DuPont, Sears, Standard Oil until the 1920s).
 Resources are organized by function

 Fit: export is just a limited domestic activity extension

 Variant: the VP export may report to VP marketing

1. INTERNATIONAL STRUCTURE

INTERNATIONAL STRUCTURE

 Dominant axes: products and international division

 Fit:
- International strategy: strongly centralized international activities by HQ
- Companies in which domestic activity is the most important (small company or large firm with
primary focus on domestic market)

Strengths Weaknesses
Risks of rivalry between domestic and
Reduces the workload of CEO on
international operations, resulting in
international matters
lack of coordination
Enables focused management team on Insufficient adaptation to local forces
international development (domestic has power)

2. GEOGRAPHIC MULTIDIVISIONAL STRUCTURE (E.G. CARREFOUR, IKEA, AIR LIQUIDE, NESTLÉ)

 GEOGRAPHIC DIVISIONAL STRUCTURE

 Primary axis: geography

 Fit:
- Multi-domestic strategy (decentralization and local adaptation)
- High FSTS (foreign sales/tot. sales)
 Multidivisional form: profit & loss centers
 Largely present in consumer products. Little present in the USA

Strengths Weaknesses
Appropriate for companies with little
Duplication of all functions at divisional
diversification in terms of
(local) level
products/services
Large autonomy for SBU – enables
Limits economies of scale (if needed)
strong national responsiveness
Focuses attention on all markets Risks of barriers that prevent the
equally when portfolio of markets is exchange of knowledge and innovation
broad across borders

MULTINATIONAL MODEL

 Organization developed as a portfolio of national companies

 Local subsidiaries are autonomous: most key assets and resources decentralized
 Headquarter (HQ) privileged the appointment of key local managers and budget/performance
reporting
  HQ essentially interested in subsidiaries’ performance, not in operating details (output-based
control)

3. PRODUCT-MULTIDIVISIONAL STRUCTURE e.g. Boeing, Johnson & Johnson, Pfizer, LVMH

PRODUCT DIVISIONAL STRUCTURE

 Primary axis: products/services

 Fit:
- Global Strategy: centralized operations (global integration) (or international strategy)
 It is (again) a multidivisional structure with a profit & loss logic
 Largely found in high technology sectors.

Strengths Weaknesses
Suitable for firms with high product
Lack of local responsiveness (if needed)
diversification
Risks of limited cross-divisional
Ideal to build economies of scale and
synergies or innovation (like in any
scope
multidivisional structure)

GLOBAL MODEL

 Foreign subsidiaries tightly controlled from the center (tight strategic and operational control
through centralized decision making.
 Most key assets and resources centralized
 Important role of HQ to exploit synergies
 Strategy based on capturing global scale economies
4. MATRIX STRUCTURE e.g. ABB (80s & 90s)- P&G since 2000

MATRIX STRUCTURE

 2 or 3 dominant axes: products & geographies (or products/functions; or geographies/functions)

 Fit:
- FSTS is high
- High product diversification
 Complexity: double reporting for Profit & Loss (P&L)
 Less & less frequent?

Strengths Weaknesses
Helps reconciling needs of broad
Paralyzing accountability
geographic & product portfolio
In practice, one axis can be more
Equalizes products and regions
powerful than the other
Interesting to build regional economies Inefficiencies: communication costs,
of scale & scope slower-decision-making

FAILURE OF THE MATRIX

 Incentives and rewards are multidimensional: efficiency (cost-oriented) and market-oriented

  However…
- Differences in country and business demands were amplified, and conflict exacerbated
- Dual reporting led to confusion
- The result: very slow decision making
 Most companies abandoned formal matrix structures, previously adopted

III. IMPLEMENTING THE INTERNATIONAL STRATEGY: PROCESSES & CULTURE

LIMITS OF CONTINGENCY THEORY

 Contingency theory assumes that firm performance is a function of the ‘fit’ between strategy and
structure
 In a globalizing context, a majority of MNEs converge towards a transnational strategy
 MNEs need a “transnational” organization. But
- matrix structure is generally a failure
- other structures apply one axis at the expense of the others

BUILDING A TRANSNATIONAL: MORE THAN A MATRIX STRUCTURE

– Matrix management focuses only on formal structure as a tool for organization design
– But to effectively manage a complex organization, executives need a much broader set of tools
– The MNE’s anatomy makes little difference: contingency theory is important in the idea of “fit” but
fit with other organization design (OD) elements is more important than fit with structure
– Physiology (processes) and psychology (culture & normative integration) are very important

FIRST MODE OF INTEGRATION & CONTROL: PROCESSES

 Ad-hoc cross-divisional, cross-functional, cross-national project management teams.

- They are flexible and reconfigurable at will
 Information systems for knowledge management and learning (intranet, e-mail, videoconferences,
newsletters, forum)

SECOND MODE OF INTEGRATION & CONTROL: CULTURE & NORMATIVE INTEGRATION

 Crucial role of HR strategies and practices:

- Incentives and rewards (used to reward appropriate behavior)
- Internal conferences, training programs and frequent socialization of top managers
  To create informal networks
- Systematic personnel rotation for diffusion of best practices & learning
 The visible behavior and public actions of senior management: top management’s actions have a
powerful influence on the company’s culture as they signal the strategic and organizational
priorities
- When Sony founder and CEO Akio Morita relocated to New York for several years to build
the company’s U.S. operations personally, he sent a very strong message about Sony’s
commitment to its overseas activities

IMPLEMENTING A TRANSNATIONAL APPROACH

 In the past the management of MNEs has been traditionally characterized by the assumptions that
- the roles of different subsidiaries are symmetrical (all alike)
- Headquarter management exercises control uniformly
 Modern, transnational corporations challenge these assumptions. Instead of treating all
subsidiaries in the same way, they:
- differentiate tasks and responsibilities,
- adopt a variety of mechanisms to coordinate the organizational units

 From Symmetry to Differentiation: Each unit has its own distinct role
 From Uni-dimensional Control to Differentiated Control

CONTROL SYSTEMS

Personal controls  control by personal contract with subordinates

Bureaucratic controls  systems of rules and procedures mainly budgets and spending rules

Output controls  profitability, productivity, growth, market share and quality. Established through
negotiation.

Cultural controls  exist when employees “buy into” the norms and values of the firm. They reduce the
need (and cost) of formal controls.

CONCLUSIONS

Structure is only one element but structure still matters:

- Importance of clear role and accountability definition: ambiguity may be detrimental to

performance
- Formal structure is increasingly complex: many dimensions are to be taken into account
and synergies are very important
The whole organization design counts and needs to be aligned with strategy

Culture must match the rest of organizational architecture’s elements, strategy and environment

16-03-2023

NTERNATIONAL BUSINESS ACROSS DIFFERENT CONTEXTS: SMEs AND FAMILY FIRMS

SMALL- AND MEDIUM-SIZED ENTERPRISES

FRAMING THE CONTEXT

The type of internationalization they can implement can be lower commitment. This companies tend to be
more oriented in exporting rather than building up new subsidiaries in the foreign market. As we know,
exporting beside not involving equity is also much less risky.

DEFINING SMEs

Issues in defining the category of SMEs:

 Europe and USA  SMEs < 250 employees

 Japan, Korea, India  SMEs < 500 employees

MAJOR BARRIERS FOR SME EXPORTERS

They have to face 2 different kind of problems:

1) ENDOGENOUS problems, which are at the firm level.

In terms of Internal barriers (micro level)  They face difficulties in selecting the most trustworthy
distributors abroad. They also face a lack of negotiating power and little understating of the target
market.also more difficult could be for them to organize foreign activities in export departments. In
addition to this, they also face some information processing difficulties, they maybe unable to
access information because they are relatively absent and short international experience may not
guide them in underthing which is the needed information. This implies that they have inefficient
resources to go abroad and unable to achieve and maintain competitive advantage to the national
arena.

2) EXOGENOUS problems, which are at the macrolevel.

In terms of external barriers (macro level)  They also face challenges coming from external
environment. They may end up entering countries with which there is high institutional distance
and lack of institutions that can support the international trade. There may also end up finding
target markets with lack of incentives from the government side toward specific categories of
companies. Plus other problems

MAJOR BARRIERS FOR SME EXPORTERS

HUMAN RESOURCE MANAGEMENT CHALLENGES:

 Lack of management education, foreign language proficiency and exposure to foreign cultures
 Importance of the attitude and perceptions of the managers responsible for handling the
internationalization
 Importance of training and development

INADEQUATE SOCIAL CAPITAL RESOURCES:

  Lack of information on export opportunities
 Bureaucratic rigidity
 Inexperience when dealing with government agencies
 Lack of gov’t support
 Lack of informal connections and inter-firm relationships

SMEs are very interesting as a resource context. They embody the internationalization process and the
internationalization challenges in a different way relatively to larger firms.

FAMILY FIRMS

FAMILY BUSINESS: AN INTRODUCTION

Family businesses are those businesses where "one or a few families, linked by ties of kinship, affinity, or
solid alliances, hold a sufficient share of the risk capital to ensure control of the business. (Corbetta, 1995)

FAMILY BUSINESS: A DEFINITION PROBLEM

Socio-emotional wealth theory is the most important theoretical framework development in the research
context. It captures the controversial nature of this type of company. The main problem of family business
is that they are subject to the so-called mixed gamble perspective.

MIXED GAMBLE PERSPECTIVE

They need to identify and balance the potential benefits and losses in both financial and socio-economic
terms.

They also have to take into account that these companies have a number of goals that do not have a
monetary value but that have to do with the preservation of socio-emotional wealth; in terms of affection
and personal relation between and among family members. They need to balance the benefits and losses in
term of socio-economic implication.

RISKS IN THE INTERNATIONALIZATION OF FAMILY FIRMS

Internationalization is a highly risky decision because it may hamper the social-emotional endowments in 3
ways:

1. Internationalize may imply that the family can lose control. For this reason, the family should hire
people abroad that are not part of the family and that are not necessary sharing the same values.
 One of the key characteristics that make family firm totally different with respect to the businesses that
are not- family is maintaining intergenerational control over the firms and going international may out
this control at risk. It depends on the number of resources that the firm has.

2. Lack of connection. Family firms suffer from the liability of foreigners and outsidership. They do not
have established relationship and networks, so they need to build new relationships. They have to
‘renounce’ to some social-emotional endowments.

3. Loss of identity. Going international implies that there is a need to modify the organizational
design, strategies, HR policies and strategical orientation. In some cases, the first generations family
members may be concerned about loss of identity and reputation.

THE ROLE OF SLACK RESOURCES

There are a type of resources which is interesting in terms of determining on what happens at the level of
internationalization of family firms. These kinds of resources are the ‘slack’ resources, which means surplus.

SURPLUS (slack)= financial resources in excess to those that are necessary to sustain the ongoing
operations of the firm.

The role of slack is controversial because it may increase the risk propensity or the organizational inertia.
Family firms having greater slack resources are also more risk taking in going international or diversity. It
may help the firms to feeling more confident in the possibility to sustain corporate growth initiative.

On the other hand, slack resources may enhance the organizational inertia in maintaining the status quo.
The concept is here that firms feel good in doing what they are doing and also, they do not conder the
possibility to change. In this case and in this kind of firms the presence of surplus is seen as a positive sign
and reinforcement, thus feeling very satisfied.

We should also consider that the role of slack resources in terms of fostering corporate growth projects at
internationalization also depends on the time perspective that we are using.

Short-term perspective Slack resources in a short-term perspective are considered as a margin safety and
a security buffer that can be used in case of need. Here social emotional wealth objectives in the meaning
of feeling safe, prevail over the growth.

Long-term perspective  Slack is regarded as a resource to embark on growth projects and various type
investments. There is a huge motivation to exploit new revenues of growth toward innovative and adopting
new technology. Family firms here tend to be more pro in investing these slack and go international and
diversify their portfolio.

EMERGING APPROACH

In the past, most research has distinguished between family versus non-family firms.

However,… Family firms are HETEROGENEOUS

 It is important to study the sources of heterogeneity among family firms