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International business strategy: effectively and efficiently matching an MNEs internal

strength (relative to competitors) with the opportunities and challenges found in
geographically dispersed environments that cross international borders.

The seven concepts of the unifying framework (brief overview)
1. Internationally transferable (or non-location-bound) firm-
advantage (FSAs)
a. Tacit know-how (difficult to transfer)
b. Explicit knowledge (easy to transfer)
Reflects the
i. Blueprints, docs, memos
distinct resource
2. Non-transferable (or location-bound) FSAs
base available to
a. Marks & Spencers: first in its chain to open. Advantage: prime
the firm, critic to
real estate Transfer to Canada transfer the advantage?
achieving success
in the
b. Best Practice: TOYOTA Supplier networks
c. Reputation based (Thumbs up vs coca cola) Switch watch
3. Location advantages
a. Silicon valley
i. Huge pool of qualified engineers (Stanford closeby)/Clusters

Complimentary skills
4. Investment in and value through recombination
a. Constitutes the heart of int business strategy: The highest-order FSA is the
ability, not just to combine reliably the MNEs existing resources, but to
recombine its resources in novel ways, usually including newly accessed
resources where in a limited geographic space or internationally
5. Complementary resources of external actors (not shown explicitly in figure)
a. Additional resources, provided by external actors bt accessible to the MNE,
which may be necessary to fill resource gaps and achieve success in the
6. Bounded rationality
Reflect the behavioural
a. We dont have the mental capacity to put together all
characteristics (of both
the information and evaluate it.
senior MNE managers
b. You have preference and you try to maximize those
and another relevant
economic actors) that
c. Utilarian theory: based on price
may impede
7. Bounded reliability
international success
a. There is inconsistency between what you expect and
what actually happens. There are limits to the extent to
which you can rely on someone.

Resource base (expressed in managerial terms)
Constitutes of various components either owned by or accessible to the firm
1. Physical resources, including natural resources, buildings, plant equipment, etc
2. Financial resources, including access to equity and loan comp
3. Human resources, including both individuals and teams. These individuals and
teams have both entrepreneurial and operational (or efficiency-related) skills
4. Upstream knowledge, including sourcing knowledge, as well as product- and
process-related technological knowledge

5. Downstream knowledge, critical to the interface with customers, and related to

marketing, sales, distribution and after-sales service activities
6. Administrative (governance-related) knowledge regarding the functioning of the
organizational structure, organizational culture and organizational systems
7. Reputational resources, including brand names, a good reputation for honest
business dealings, etc.

A firm can have FSA in each of the above resource areas. The nature, level and
contestability of these strengths vis--vis rivals should, in principle be identifiable
through a properly conducted benchmarking exercise.



Chapter 1: Conceptual foundations of international business strategy

1. Internationally transferable FSA and the four MNE archetypes
The MNE creates value and satisfies stakeholder needs by operating across national
borders. When crossing the MNE is, almost by definition, at a disadvantage as compared to
firms form the host country, because these firms possess a knowledge basis that is
appropriately matched to local stakeholder requirements.
- The MNE incurs additional costs of doing business abroad, resulting form cultural
economic, institutional and spatial distance between home and host country
- To overcome this, the MNE must have proprietary internal strengths, such as
technological, marketing or administrative (governance-related knowledge).
- This set of strengths is called the non-location bound FSAs
o These FSAs do not stop creating value when the border is crossed between
home and host country.
o This can also be a embodied in a final product. I.e. when the MNE exports
gods and services that are valued highly by host country customers
Intermeidiate products (quality control)
Exploitations of FSAs abroad can also be done by external actors
(such as licensees), or by network partners (such as joint venture
partners or distributors)
The paradox of an internationally transferable FSA is the following:
If the FSA consists of easily codifiable knowledge (explicit knowledge such as blueprint),
then it can be cheaply transferred and effectively deployed and exploited abroad, but it can
be easily imitated by other firms. (Cost of FSA transfer relatively but potential value also
relatively , namely if competitors can easily imitate what the MNE is best at)
IN CONTRAST MNEs face great difficulty transferring tacit knowledge (because this
cannot fully be replicated through simple communication channels, it requires person-
to-person communication and is necessarily associated with sending human resources
abroad, building up experience over time, learning by doing etc.)
Example: most important bundle of tacit knowledge is contained in the MNEs
administrative heritage: key routines developed by the firm since its inception

THERE ARE 4 MNE Archetypes of administrative heritage
1. Centralized exporter (market seeker)
a. This home-country-managed firm builds upon a tradition of selling product
internationally, out of a limited number of (scale-efficient) facilites in the
home country and with only minor, usually customer-oriented, value
creating activities abroad
b. Standardized products manufactured at home embody the firms FSAs
(themselves developed on the basis of a favourable home country
environment, including local clustering) and make the exporting firm
successful in international markets.
c. Foreign subsidiaries act largely as facilitators of efficient home country
i. Economies of scale
ii. Standardize products and sell it in the host country.
2. International projector (cloning home operations)

a. The firm builds upon a tradition of transferring its proprietary knowledge

developed in the home country to foreign subsidiaries, which are
essentially clones of the home operations
b. Knowledge-based FSAs developed in the home country are transferred to
subsidiaries in host countries. The international projector MNE seeks
international expansion by projecting its home country success recipes
3. International coordinator (coordinate location advantages in host countries)
a. The international coordinator builds upon a tradition of managing
international operations, both upstream and downstream, through a
tightly controlled but still flexible logistics function
b. International operations are specialized in specific value-added activities
and form vertical value chains across borders. The MNEs key FSAs are in
efficiently linking these geographically dispersed operations through
seamless logistics.
ii. You transfer your assets and clone them (Disney Land)
4. Multi-centred MNE (building on host countrys location FSAs)
a. The multi-centred MNE consists of a set of entrepreneurial subsidiaries
abroad, which are key to knowledge-based FSA development. National
responsiveness is the foundation of the international strategy. The non-
location-bound FSAs that hold theses firms together are minimal: common
financial governance and the identity and specific business interests of the
founders or main owners (typically entrepreneurial families or investors)
i. Multicentred MNE should be viewed as a portfolio of largely
independent businesses. Many older European MNEs fit this mould
(unlike Japanese MNEs)
b. Youre present in different countries. But youre taking a different set and
recombining it with the local aspect in the host country.
Although there are 4 archetypes that describe the bulk, there are other types. However, the
commonality among all these types is the transfer of at least some FSAs across borders
- I.e .not included in the 4 are freestanding compnies (companies that were
set up abroad mainly by British and Dutch investors.
o Public policy and institutional convergence greatly reduced the additional
costs of doing business abroad, and provided home country entrepreneurs
with more direct access to the location advantages of the host countries
- Emerging Economy MNEs (EMNEs). These firms do not derive their strenths
primarily from advanced technology, brand names or a a sophisteicated logistics
apparatus, rather on building on their own resources. Their early stages include;
o Entrepreneurial quality of management
o Management capabilities in effective strategy execution
o Learned technologies, resulting from a role as licensee or subcontractor
for technology rich MNEs from developed economies.
o Learned knowledge from early alliance formation with other MNEs
whereby the EMNE may have provided strength in government relations
or access to local resources to the alliance.
o Privileged access to home country resources

o Cost innovations/operational excellence, sometimes as the result of

functioning in adverse environment circumstances and ill-functioning
external markets
o Ability to adapt technology/products to emerging economy needs
2. Non-location bound FSAs (4 main types)
1. Stand-alone resources linked to location advantages, such as a network of
privileged retail locations leading to a dominant market share in the home
market (as often found in retail banking), are immobile and therefore inherently
2. Other resources such as local marketing knowledge and reputational knowledge
and reputational resources, may not have the same value across borders
3. Local best practices: may not be considered as such abroad by a variety of
stakeholders and might even be deemed illegal (i.e. routines/systems/buyer-
supplier relations)
4. Even the firms domestic recombination capability may not be adept enough to
confront the additional complexities of foreign. This may lead to a dominant
market share and superior expansion rate in the home country, as the firm
engaged in product diversification or innovation, and thereby its geographic
market coverage domestically.
3. Location advantages
Represent the entire set of strengths characterizing a specific location, and useable by
firms operating in that location. There strengths should always be assessed relative to
the useable strengths of other locations
- I.e. a superior educational system another location advantage will support firms
that build upon sophisticated human resource skills
- Or home country advantages (natural resources)

Why would an MNE want to engage in FDI in a host country?
- FDI: the allocation of resource bundles (combinations of physical, financial,
human knowledge and reputational resources) by an MNE in a host country, with
the purpose of performing business activities over which the MNE retains
strategic control in that country
- Answer: MNE should engage in FDI only if the host country confers a location
advantage relative to the home country; several motivations
o 1. Natural resource seeking: entails the search for physical financial or
human resources in host countries
o 2. Market seeking: reflects the search for customers in host countries
Host country loc. advantage: the presence of customers willing
and able to purchase the firms product (NOT THE SAME AS
o 2. Strategic resource seeking: the desire to gain access to advanced
resources in the sphere of upstream knowledge downstream knowledge,
administrative knowledge or reputational resources
o 4. Efficiency seeking: the desire to capitalize on environmental changes
that make specific locations in the MNEs international network of
operations more attractive than before for the consilidation or
concentration of specific activities

4. Value creating through recombination

The firm is able to grow by innovating and diversifying. This means combining in novel
ways existing resources, often in conjunction with newly accessed resources. (Aim is
finding new profitable ways to use resources)
- Resource combination require 3 things:
o 1. Entrepreneurial skills (managers + employees) to face new productive
o 2. Slack or unused productive resources, beyond those needed for the
efficient functioning of current operations
o 3. The willingness and capacity to let go of some resources embedded in
extant FSAs, and to replace these by resources with higher value creating
potential in host enviroms.
o Continuous innovation and effective exploitation of innovation is required to
stay ahead of the competition
MNEs highest order FSA ;
- The MNEs recombination capability leads to processes and products that embody
integrated bundles of knowledge, meaning melded bundles of old and newly accessed
- The firm cannot only transfer abroad its existing set of FSAs, but also create new
knowledge, integrate it with the existing knowledge base and exploit the resulting, new
knowledge bundles across geographic space in ways that satisfy stakeholder needs

Pattern 1: I
Pattern 2:
Pattern 3:
Pattern 4:
Pattern 5:
Pattern 6:
Pattern 7:
Pattern 8:
Pattern 9:
Pattern 10:

5. Complementary resources of external actors
Some success ingredients may be missing and these can be provided by external factors
- International development of the required strengths is expected to bring a lower
net value than relying upon external factors
- The need to rely on external can be satisfied in practice, and does not jeopardize
the specific expansion project considered.

6. Bounded rationality
Reflects scarcity of mind; meaning that the managers responsible for making decisions and
engaging in purposive action in the firm always face information problems
1. Access to information sufficient in quality and quantity to guide decision making
and managerial action
a. Any information about the environment relevant to the MNEs functioning
and performance, especially about the future state of the environment, is

necessarily partial and incomplete, giving the complexity and uncertainty

characterizing the environment and its evolution.
2. Limited capability to process complex information bundles
a. Problems of processing information, especially in determining its
relevance to the firm and its implications for strategy.
Example: Commonly encountered by senior managers of MNEs, is the phenomenon that
senior managers in the home country and senior managers in the host country may
adopt difffent decision-making approaches.
They may select different information as relevant to strategy, given the multifacetedness
of the relevant information (variety of types of accessible information)

6. Bounded reliability
Imperfect effort towards pre-specified goal achievement, thereby leading to incomplete
fulfilment of promises

Chapter 2: The critical role of firm-specific advantages

Two perspectives
- Prahalad & Hamel, 1990 (P&H)
o Senior managers should view their firm as a portfolio of corporate
competencies which are its high-order FSAs (i.e. shared knowledge).
o According to P&H, core competencies, meaning the firms routines and
recombination capabilities, produce components called core products,
which are put together to create end products.
- Bartmess & Cerny (B&C)
o Explains the implications of a core-competencies approach when the MNE
expands internationally

There are 3 characteristics to help managers identify core competencies (A core
competence should)
1. Be difficult for competitors to imitate in terms of achieving the required internal
coordination and learning
a. Which points to the distinctiveness of the firms routines and recombination
2. Provide potential access to a wide variety of markets
a. Which points to the capabilitys contribution towards combining or
recombining resources for success in new environments
3. Make a significant contribution to the perceived customer benefits of the end
a. Which points to satisfying the needs of customers, a key stakeholder group

In addition to these 3 there is a 4th characteristic (implicitly assumed by P&H)
4. The loss of a core competence would have an important negative effect on the
firms present and future performance
a. In terms of value creation and satisfying stakeholder objectives

Furthermore, there is the issue of acquiring FSAs through external strategic alliances
rather than through internal, organic development.
- So, the firm intends to internalize the knowledge and skills of the alliance
o Thus furthering the creation of the companys own technological and
process-related FSA
o B&C argue that manufacturing knowledge in fact, any type of
knowledge embedded in a single functional area such as R&D or
marketing is not a core competence in and of itself.
Core competencies involve the combo of stand-alone-knowledge
bundles found in different functions into routines, as well as the
further recombination of existing resource bundles with new
Successful? Entire set should be transferred abroad
- Outsourcing strategies for key components, as a shortcut to increased short-term
profitability, may lead to the loss of FSAs

Assuming a given volume of information that must be exchanged between two

distinct activities, these 5 criteria together determine the scope of the bounded
rationality problem that must be solved;
1. Complexity
a. Higher complexity requires, geographic proximity to be effective and
2. Required level of interaction
a. Lower predictability of info+need for two-way info requires geo proximity
3. Similarity of background and expertise
a. Less similarity, more difficult to communicate from a distance
4. Requirement of a prior relationship
a. Sensitive communication between related activities req. prior relationship
5. Concreteness of information
a. Does not simply refer to tacitness of ino in technical sense. But also the
info beyond its verbal content (emotions, feelings and cultural values may
be embedded in the information transmitted)

Chapter 3: The nature of home country location advantages
Porter, 1990 (The competitive advantage of nations)
- Any companys ability to compete in the international arena is based mainly on
an interrelated set of location advantage
- A high level of pressure in its home base pushes the firm to innovate and to
upgrade systematically, resulting in FSA creation.
o These FSAs are instrumental to expansion in foreign markets
o A nations competitiveness depends on the capacity of its industry to
innovate and upgrade.
- Companies gain advantage against the worlds best competitors
o Because of pressure and challenge. They benefit from having strong
domestic rivals, aggressive home-based suppliers, and demanding local
- Porters diamond consists of:
o Factor conditions:
Factors of production in the home base such as natural resources
& More importantly: created factors conditions such as skilled
labour, scientific knowledge & infrastructure
o Demand conditions:
Focus on domestic market size & domestic buyer sophistication
o Related and supporting industries:
High-quality internationally competitive home-based suppliers
Companies related industries are critical to the firms international
o Firm strategy, industry structure and rivalry:
Highly competitive, home-based industry with efficient macro-level
governance and several domestic rivals may help the firm in that
industry become internationally competitive

Porter focuses primarily on the rise of industries at the national level, and less on
firm-specific challenges. As a result his provides relatively little practical guidance

to the managers or owners of newly established firms, in terms of what location

advantages can or should mean to them.

Chapter 4: The problem with host country location advantages

Pankaj Ghemawat (2001) HBR: Distance still matters: the hard reality of global
expansion. Here he explains that although technology makes the world smaller, it does
not elimate the cost of distance. Demonstrates that firms often overestimate the
attractiveness of foreign markets while neglecting risks arising from DISTANCE.

Distance (CAGE):
1. Cultural distance:
a. Results from difference in national cultural attributes such as language,
religious beliefs, social norms and race
i. I.e. Star TV underestimating the markets preference for locally
produced, Chinese language content
2. Administrative (or institutional) distance
a. Reflects differences in societal institutions. This distance can be low (or
lowered) if two or more countries share a common history (including
colonial relations), have political ties, have engaged in efforts towards
economics and monetary integration or preferential trading
arrangements, and synchronize government policies.
i. I.e. in order to protect domestic industries, host countries raise
barriers through trade tariffs, quotas, restrictions on foreign-owned
companies and preferential treatment of domestic firms
3. Geographic (or spatial) distance
a. Represents the physical distance between countries, taking into account
the ease of transport between the countries. Having a common border or
easy access via river and ocean waterways may keep this distance low.
Differences in topographic or climate my make this distance higher.
Human intervention, such as the creation of efficient transportation and
communication links, can reduce this distance.
i. More than physical proximity! It encompasses other aspects affecting
the separation of countries in space (and therefore in time),
including man-made elements such as transportation costs,
communication infrastructure.
ii. Ghemawat: products with low value-to-weight ratios (such as
steel and cement) and highly perishable items incur the greatest
cost increases as transportation distances increase (CEMEX)
4. Economic distance
a. Represents differences in consumer wealth, income level and distribution,
infrastructure characteristics, the cost and quality of natural, financial and
human resources, and prevailing business practices.
i. Two broad approaches
1. Replicating existing competitive advantages, building upon
scale and scope of economies
2. Exploiting differences in input costs or prices between
markets through economic arbitrage

Ghemawats methodology is based on a thorough analysis of economic data concerning

international trade. He regressed trade between every possible pair of countries in the
world in each of 70 industries on each dimension of distance. Each distance component
comounds the bounded rationality problem faced by the MNEs senior management: the
problem of uncertainty increases, as does the problem of imperfect processing of

Ghemawat demonstrates that the extent of globalization has been vastly exaggerated.
The dot com boom was supposed to signal the end of distance. A truly global
marketplace would materialize thanks to information technology, with unlimited
potential for firms to expand in foreign markets etc. With this article Ghemawats
dismisses the blief that distance has finally been conquered and that the CAGE distances
are here to stay.
1. Vestring, Rouse & Reinert wrote a complementary perspective with the
message that MNEs intending to be cost leaders in their industry should establish
portfolios in low-cost countries to which selected activities can be outsourced.
They observed that many cost leaders in industries ranging from automotive and
chemicals to consumer products and technology do not simply outsource to a few
high-profile low-cost destinations (i.e. China & India) but attempt to reduce risk by
including a broader set of countries in their offshoring strategy. They do caution
against undisciplined fragmentation of offshoring activities
o They focus on the benefits of accessing multiple, high-distance input
Whereas Ghemawat focuses on the risk of penetrating too many of
high-distance output markets. For Ghemawat distance is
fundamentally a barrier; for Vestring et al it is fundamentally
an opportunity (i.e. a large MNE would be insufficiently
diversified if it outsourced only to China, labor cost might be
low, but it has more political uncertainty
o They argue that large MNEs should develop a particular recombination
capability: an FSA in offshoring.
In practical terms, that means that strategic offsoring decisions are
not left to individual business units, but are handled in a
centralized fashion to create cost advantages across business
units by pooling resources, jointly developing new suppliers or
expanding economies of scale in low-cost countries.
o The authors implicitly take on Ghemawats suggestions: that they
must be well informed on all relevant cost categories and other
relevant country characteristics
2. Schmidt & Pan complementary perspective focuses on the cultural distance
components and provides guidance to Western MNEs selling branded consumer
products (e.g. soft, drinks, entertainment, health care etc) when penetrating the
high-distance Asian markets.
a. Attention must be devoted to selecting the right corporate and
product brand names
i. i.e. in Asia do the strokes, characters have the same meaning as you
want them to have
b. Attention must be devoted to creating the right image.

i. Here the corporate image is often more important than the image
created for an individual product. This contrasts with the US,
where the corporate brand name may mean little to consumers in
terms of the value they attribute to it, divorced from a particular
c. Asian perceptions are affected by the collectivist nature of Asian
society meaning inter alia that specific reference groups may be
critical in persuading customers to purchase a product, and that
comparative advertising, including criticism of other firms, is
i. Schmitt & Pans implicit message is that senior management must
either pay sufficient attention to these shopping lists of distance
components or else follow Ghemawats perception and avoid such
high-distance markets altogether.

Chapter 5: Combining firm-specific advantages and location advantages in a
multinational network
Bartlett & Ghoshall (1986) How MNEs should manage their subsidiary network. They
suggest that (1) many MNEs mistakenly view host country subsidiaries simply as
recipients and distributors of company knowledge and products. These MNEs do not
recognize the MNEs potential to develop unique bundles which in turn can make the
corporate HQ isolated and oblivious to changing conditions in key international markets.
(2) The HQ hierarchy syndrome; senior management views the organizations as
consisting of two distinct levels;
- Dominant
o Corporate HQ control key decision-making process and overall company
resources in order to implement a consistent global strategy
- Subordinate
o National subsidiaries, merely act as implementers and adapters of the
global strategy in their localities.

These two simplifying strategies homogenization and centralization cause tensions
between headquarters and subsidiaries, as corporate HQ attempt to maintain control of
the subsidiary network, while entrepreneurial subsidiary managers fight for more
independence and freedom of action in their local markets.
- B&G Both have dysfunctional effects on the MNE.
o Strategy 1: important markets and subsidiaries are treated in the same
way as unimportant ones, and therefore the opportunities they provide
are not fully exploited.
o Strategy 2: subsidiaries with a distinct, specialized resource base are
unable to excape from an implementer role and unleash their
entrepreneurial abilities.

In response to these problems B&G observed a number of MNEs have moved towards an
organizational model of differentiated rather than homogenous subsidiary roles and
dispersed rather than concentrated responsibilities. (Either positive or negative)
Types of subsidiary categories
1. Black hole: rather weak unit in terms of specialized resources, but it is located in
a strategically important market. The MNE can use this unit to maintain a

presence in a key market in order to keep abreast of new innovations or strategic

moves by competitors, despite a lack of specialized resources or even
profitability in the local subsidiary unit itself.
a. The black hole status does reflect, however, an undesirable
competitive position in a key market.
i. In the longer run, MNEs may want to commit more resources to
such markets in order to build up their subsidiary, or they may
want to engage in acquisitions or strategic alliances in order to
access complementary resources and improve market success.
2. Implementer: Subsidiary with weaker (or absent) specialized resources, and
located in a market of lesser importance with respect to the MNEs long-term
survival, profitability and growth.
a. Authors suggest that most MNEs subsidiaries are in this category.
b. Implementers are often key to a firms overall success, however, because
they may generate a steady stream of cash flow, and may help build
competitive advantage by contributing to companywide scale and scope
3. Strategic leader
a. This is a highly competent local subsidiary in a strategically important
market. The role of this type of business unit is to assist corporate HQ in
identifying industry trends and developing new FSAs in response to
emerging opportunities and threats.
4. Contributor
a. Highly competent national subsidiary, but one located in a less important
b. This subsidiary type has typically developed new FSAs, often as the result
of an entrepreneurial host country management team. Its subsidiary-
specific, specialized resource base might then benefit other units in the
firm if corporate HQ understands its potential economic value to the
entire MNE.

Strategic importance
of the local market





Resource base of the subsidiary

Keeping these four subsidiary categories in mind, senior management at corporate HQ
must provide a clear sense of overall strategic direction, and allocate appropriate roles
and responsibilities to the different subsidiaries in the MNE network; as a function of the
specialized resources they command and the importance of the market in which they
are located.

Context and complementary perspectives

B&G saves it harshest criticism for the homogenized, undimensional approaches to

subsidiary management commonly used by centralized exporters, international
projectors and to some extent multi-centred MNEs expanding in the post WW2 period up
to the mid 80s. While the iron curtain was still up an communist countries like China
remained essentially closed to foreign MNEs, many firms continued to grow their
international operations. Their expansion into foreign markets typically followed the
blueprints of and conventional cookie cutter patterns of FSA development and
exploitation that had been set by the founders of the firm or its senior management in
the early stages of its international growth.
1. Chan Kim & Mauborgne on the topic of due process: this refers to the way
strategic decisions are made, irrespective of their outcome. C&M agree with
B&G on that senior maangers at MNEs faced with strategic management
decisions often centralize the decision-making process, presenting subsidiary
managers with a demotivating fait accompli (something already done)
rather than bring out the best in them. The problem with this is that it destroys
the entrepreneurial spirit and motivation in such subsidiaries. However, rather
than focussing on treating subsidiaries differently as a function of their specialized
resources and the stratefic importance of their location as B&G. C&M note that
subsidiary managers attach substantial importance to due process and will usually
accept an allocation of MNE resources that does not benefit their unit. (attach
important to due process, i.e. to the way strategic decisions are made,
irrespective of the outcome = procedural justice)
a. Due process (also called procedural justice) implies that decision
making respects 5 simple principles
i. Corporate hqs familiarity with the local situation at the subsidiary
1. This implies that senior managers at corporate hq
understand or at least appear to understand- all the
implications of specific decisions for the subsidiaries
ii. Effective two-way communication between corporate hq and
1. In particular the bottom-up part of this two-way
communication signals that senior managers at corporate
hq take subsidiary managers views seriously and are
willing to engage in a dialogue with these managers
iii. Consistency in decision making across subsidiaries:
1. Consistency in the sense of adopting clear and transparent
criteria and routines to make decisions across the entire
subsidiary network prevents perceptions of politicized
decision making and favouritism advantaging one
subsidiary over another.
iv. Possibility for subsidiary managers to challenge the dominant
perspective at corporate hq
1. This signals to subsidiary managers that senior
management at corporate hq even if confident in its
perspective is nonetheless willing to hear its assumptions
and conclusions challenged by individuals in the trenches,
knowledgeable about the local situation in host countries

v. A transparent explanation of final decisions made by corporate hq

1. Here senior management at corporate hq makes a serious
effort to explain in depth the rationale for the decisions
made, thereby pre-empting any second-guessing or
rumours on the substantive reasoning behind these
b. Due process can reduce bounded rationality problems in the MNE i.e.
by actively seeking input from host countries.
2. Neghandi, Eshgi and Yuen predate but also complement B&Gs study by adding
the strengths and weaknesses of Japanese MNE subsidiary management. The
conclusion of their article is that strong FSAs in technology, production and
government relations do not imply a strong FSA in managing a foreign subsidiary
network. In fact, tendencies toward homogenization and centralization prevent
many Japanese MNEs from developing strategic leader subsidiaries, especially in
the real of upstream activities such as R&D.
a. Five main problems found in Japanese MNEs:
i. Adopt a centralized, autocratic approach vis--vis their foreign
subsidiaries, without much evidence of a consensus-based
management style.
1. In many cases, foreign subsidiaries are simply informed
after the fact about important decisions made by senior
management at corporate hq.
ii. Relatively little confidence in the ability of non-Japanese managers
in host countries
iii. Relationships of trust established between corporate HQ and
foreign subsidiaries are usually confined to a few key managers in
these subsidiaries.
iv. Japanese staffing policies are often ethnocentric. Compared with
their Japanese counterparts, non-Japanese managers frequently
face unofficially ceilings on promotion, as well as different career
paths, job security, training options and fringe benefits
v. Though theyre particularly sensitive to host government
regulation and the rule of law in general, try to avoid unions and
frequently discriminate against women and minorities
Main conclusion that arises is that strong FSAs in technology , production and government
relations do not imply strong FSA in managing a foreign subsidiary network. In fact,
tendencies towards homogenization and centralization prevent many Japanese MNEs from
developing strategic leader subsidiaries, especially in the realm of upstream activities such
as R&D.

PART 2: Functional issues

Chapter 6: International innovation
This chapter examines Kuemmerles idea that many MNEs, particularly international
projectors, are wisely decentralizing their R&D by building worldwide networks of R&D
labs. Building upon the home-base concept developed by Michael Porter (ch.3),
Kuemmerle indentified two distinct types of host country R&D acilities based on their
primary strategic role inside the MNE: home-base-exploiting sites and home-base-
augmenting sites;
1. Home-base-exploiting sites primarily receives information form the central
lab in the home country and adapt products to local demand
a. Information flows to the foreign laboratory from the central lab at home.
2. Home-base-augmenting sites primarily access local knowledge and send
information back to the central lab
a. With these labs, information generally flows from the foreign laboratory
to the central lab at home.

There are two main reasons for this trend.
- First, many MNEs feel they need to be present in various knowledge and
innovation clusters scattered around the world.
- Second, given the commercial requirement of moving quickly from innovation to
market, MNEs must integrate their R&D facilities more closely with host country
manufacturing operations, so as to support complex production tasks.

Three key stages in developing of foreign R&D units:
1. Selecting decision makers
a. Most set up a technology steering committee (reporting directory to CEO)
2. Set of decisions and actions that streghten the faclitys initial capabilities
a. Home-augmentening and home-exploiting have different needs and
require different skills.
i. HB Exploiting labs should be located close to key markets and the
MNEs own foreign manufacturing units so that the firms
technological innovations can be rapidly adapted to host country
requirements if needed, and absorbed by host country
manufacturing operations
1. One of the key bounded rationality problems facing the MNE is reducing the
distance between home country R&D operations and host country
manufacturing operations
2. A home base explointing R&D operation (particularly if led by managers from
within the company) will reduce this distance.
ii. HB Augmenting labs should be located in critical knowledge
clusters relevant to the MNEs businesses, where they will be well
positioned to tap into new sources of innovations
3. The decisions and actions designed to maximize the labs contributions to the
MNEs overall coroporate strategic goals
a. To maximize the labs contributions to the MNEs strategic goals, each lab,
especially the home-base-exploiting ones, should interact regularly with
the other R&D units, as well as the firms manufacturing and marketing

Kuemmerle offers the following 4 qualities of the ideal profile of R&D unit leaders whom
are instrumental to the necessary knowledge recombination;
- Respected scientists or engineers and skilled managers
- Able to integrate the new site into the companys existing R&D network
- Comprehensive understanding of technology trends
- Able to overcome formal barriers when they seek access to new ideas in local
universities and scientific communities

R&D lab managers must be able to marshal the resources necessary for the lab to be
successful in meeting its objectives, including new FSA development.

Kuemmerle illustrates that MNEs are increasingly adopting an interlinked network of
host country facilities to improve their R&D efforts, rather than relying on a centralized
approach with all core R&D performed in the firms home market. In addition, the labs
can play different roles, depending on whether their primary purpose is to exploit
knowledge or augment knowledge.

Chapter 7: International sourcing and production
Kasra Fewdows making the most of foreign factories (HBR)
This chapter will extend the analysis of ch. 5 & 6, looking at how MNEs can tap their
foreign factories. Research based on a wide variety of sources, including his own
consulting work with a dozen large manufacturing MNEs, 4 year study etc.

Ferdows attempts to answer one key question: How can a factory located outside
of a companys home country be sued as a competitive weapon not only in the
market that it directly serves but also in every market served by the company?
- Answer depends on the mindset of home country senior managers:
o Senior managers who view their factories merely as sources of efficient,
low-cost product typically dont allocate their factories many resources
These managers get only what they expect: efficient, low-cost
o Senior managers with higher performance expectation from their foreign
factoris require innovation and customer service as well
These managers generally expect their foreign factories to be
highly productive and innovative, to achieve low costs, and to
provide exemplary service to customers throughout the world.
They allocate their factories more resources and get more in

Ferdows observes that the most successful manufacturing MNEs view their foreign
factories as sources of FSAs beyond the ability to save costs as with conventional
offshoring plants.

Beyond the traditional motives such as tariff & trade concessions, cheap labor, capital,
subsidies and reduced logistics costs; MNEs should levarage their foreign factories to get
closer to customers and suppliers to attract skilled and talented employees, and to
create centres of expertise for the entire company

There are three changes in the international business environment driving the
assignment of these new foreign factory roles;
1. International trade tariffs declined substantially in the second half of the 20th
century, reducing the need to establish foreign plants merely to overcome trade
2. Modern manufacturing is increasingly technologically sophisticated (meaning
capital-intensive) and has complex supply-chain requirements
a. MNEs seldom select manufacturing locations based simply on the
lowest possible wages, rather the emphasis is on the overall
productivity level (factors influencing that; infrastructure,
technology, worker education and skills
3. Time frame available to move from development to actual manufacturing and
marketing has become shorter
a. MNEs increasingly co-locate development and manufacturing
activities in highly specialized plants, which then receive broad
geographic mandates within their areas of expertise.

This falls in line with ch. 6 that a successful penetration of foreign markets requires
more than merely transferring non-location-bound knowledge from the home country
to the host country.
- The subsidiary must develop, in its own right, internationally transferable FSAs
building up the location advantages of the host country cluster.

The article distinguishes among six possible roles for foreign manufacturing facilities,
based upon two parameters;
1. Strategic purpose of the plant
a. Proximity to the market (importance of output markets for selling the
b. Access to low-cost production (factories need to acces input markets)
c. Access to knowledge and skills (often closely tied to both in- and output
i. Encompasses need to tap into input markets, but the ultimate goal
is to serve (output) markets with innovative products.
2. The level of distinct FSAs held by the plant (weak or strong)

Six roles of foreign manufacturing plants
1. Offshore factory
a. Primarys purpose simply access low-cost production factors as an
implementer on the input side
b. The plants manufacturing output, typically predetermined by senior
management in the home country, is then exported.
c. This factory type typically does not develop new FSA + receives
minimum autonomy
2. Server factory
a. Primarys purpose manufacture goods and to supply a predefined,
proximate national or regional output market
b. Market imperfections such as trade barriers, logistics costs and foreign
exchange exposure usually explain the establishment of such factories in
specific host countries





c. May engage in some FSA development, but it ultimately has a narrow

charter with relatively little autonomy or specialized capabilities
Outpost factory
a. Primarys purpose to gather valuable information from advanced
host country clusters, mainly on the input side (Similar to black hole
type subsidiaries)
b. On the manufacturing side, this role is usually combined with that of an
offshore (input market driven) or server (output market driven) factory
Source factory
a. Primarys purpose gain access to low-cost production factors on the
input side, similar to an offshore factory. However it also receives
resources to engage in resource recombination and to develop FSAs that
will turn it into a best practice plant in the MNEs network for the
assigned product range More autonomy in terms of logistics,
product customization etc.
b. The MNE sets up source factors in locations with good infrastructure and
a skilled workforce.
i. May be a strategic leader on the input side of the value chainx,
but nonetheless has a narrow charter
Contributor factory
a. Primarys purpose oriented towards the host country/region output
b. Similar to server factory, but it commands stronger capabilities.
i. More, at the upstream end of the value chain, it is responsible for
resource recombination in the form of process improvements,
new product development, customizations etc
Lead factory
a. MOST IMPORTANT in terms of resource recombination and new FSA
b. Accesses valuable inputs from the local cluster where it is embedded and
plays a key role in localized manufacturing innovation.
i. Closely connected with both the key players on the input side (such
as research labs) and the end users on the output side.

Overall an MNE should upgrade its offshore, server and outpost factories so that they fain
the ability to develop FSAs such as source, cotributor and lead factories.
- However this upgrading requires a high level of commitment, as it entails a
substantial investment of time and resources, as well as changes in a factors
culture and management style!!

Upgrading is spread over 3 stages;
1. Enhancing internal performance (i.e. through employee training+edu)
2. Accessing and developing external resources (i.e. strengthening the plants
supplier network and improving logistics integration with distributors
3. Developing new knowledge that can benefit the overall MNE network

Emphasis of upgrading lies on the intangible internal strengths and location
advantages rather than tangible (lower costs etc)
The solution lies in specialization.

Ferdows cautions managers about 4 common obstacles that may prevent the
upgrading of foreign factories:
1. Fear of relying on foreign operations for critical skills
2. Treating overseas factories like cash cows and neglecting long-term investment
3. Creating instability by shifting production in reaction to fluctuating exchange rates
and costs
4. Enticement of government relocation incentives to move factories to new locations
that possess minimal potential for upgrading

Insert figure page 222

Chapter 8: International finance
Lessard & Lightstone How MNEs should deal with economic exposure (different
from transaction and translation exposure)
- Economic exposure: the (possbibly negative) impact of (largely unexpected)
changes in real exchange rates (on a firms competetitiveness) relative to the
MNEs competitors
o To minimize this impact L&L recommend that senior managers strive to
Have a flexible sourcing structure
I.e. be able to shift production form one country to another
quickly and efficiently
Attain the capability to engage in exchange rates pass through
I.e. capability to raise prices in response to exchange rate
fluctuations without losing sales volume
- Transaction exposure: risk of financial losses resulting from outstanding but
unfulfilled contractual commitments (i.e. sales contracts in different currency)
- Translation exposure: risk of losses resulting from the translation of accounting
statements expressed in foreign currencies into the home country currency at
consolidation date

The issue is not to understand how fluctuating foreign exchange rates directly affect the
companys income stream, but rather to gain insights into the longer-term relative
inpacts of these fluctuations on income streams

Ie. If two firms have the exact same structure in terms of sourcing (pridcut
differentiation, flexilbility to shift product) from a foreign country then a
fluctuation of the exchange rate will affect them in the same way, however if one
sources from another country then it affect the firms differently
o Since the firm with the strongest market position, most differentiated
products and the greatest flexibility to shift production will incur the
lowest negative impact on the net present value of its future income
This can also occur in purely domestic firms without foreign
operations or product if their market rivals include MNEs whose
competitive position is positively affected by exhange rates for
internationally sourced inputs.

It is important to distinguish between real vs nominal exchange rates, as it changes
in the real exchange rate affect the level of economic exposure!
- If in the very long run purchase power holds than (starting from an equilibrium)
differences in inflation rates and resulting price levels between countries should
be precisely offset by corresponding changes in their nominal exchange rate.
o In that case, real exchange rate would be negligible.
- However, causal empiricism teaches that differences do persist in the medium
term (sometimes several years), and its these real exchange rate fluctuations that
create economic exposure risk for companies:
o In the short run of 6 months to several years, however, exchange rates
are volatile and greatly influence the competitiveness of companies selling
to the same market but getting materials and labour from different
- I.e. if a US company sells and finances within the US then it has no transaction
and translation risk, however if its main competitor is Japanese it will have an
economic exposure.
o When the US dollar depreciates against the yen. Then the US firm has a
competitive advantage, however when the dollars real exchange rate
increases the position will be weakened through higher relative costs.
o Only in cases whereby the nominal exchange rate changes between the
dollar and yen correspond exactly with differences in inflation rates
between the US and Japan, is purchasing power parity maintained.
- Nominal rates: The direct exchange rates between currencies
o i.e. nominal rate of 4%
- Real exchange rate: Changes in the nominal exchange rate minus the difference
in inflation rates between two countries
o i.e. real rate 4% - 3% (inflation difference)

Economic exposure not only depends on decision-making inside the individual firm, but
also on choices made by rivals in terms of the geographic configuration of their
investments and their sourcing policies.

According to L&L there are 3 important elements of economic exposure:
- Economic exposure should be viewed as a parameter that adds uncertainty to the
value of a firms location advantages

o Implies that even unfettered access to location advantages in a desirable

geographic area may not lead to long-run competitive advantage if the
economic value attributed to these location advantages depends on the
evolution of macro-level parameters such as currency exchange rates
Economic exposure concept also implies that the location advantages benefitting
an MNE should be considered
o Not solely in a positive sense, and on country-by-country basis, but also as
a portfolio of potential risks for future cash flows.
MNEs can choose to develop specific FSAs allowing risk mitigation in the foreign
currency are by immunizing their porducts to economic exposure, thereby
allowing full exchange rate pass through.
o Firms occupying a market leadership position with highly differentiated
products will generally be best positioned to engage in exchange rate pass
they can adjust their pricing if necessary to offset any increased
costs arising from economic exposure without incurring a los in
sales volume (for such firms economic exposure is minimal).

Inspired by L&L the following figure provides a classification of operating exposure
at the subsidiary level:


The vertical axis represents the capability relative to rivals to adjust its source
structure and thus its cost position, to a potential new exchange rate reality.
The horizontal axis shows the units capability to pass through changes in real
exchange rates
o Is the subsidiary in a position to pass any price changes on to its
customers? (in 3. This is the case, the firm can do this without a loss of
o 2. MNEs in this quadrant typically sell commodity-type products, the sales
of which can be greatly affected by even a small price increase (high price

Also typical for subsidiaries that import products from the parent
company home (FX risk) and that lack a strong market position in
the host country (i.e. lot of competitors)

In the long run managers should consider economic- exposure when setting strategy
and worldwide product planning. Companies that hedge their transaction exposure but
fail to take economic exposure into account may be actually raising their total exposure

They suggest that companies typically manage economic exposure through one of three
approaches, which tend to be more strategic than administratively oriented, currency
hedging instruments available for managing contractual exposure:
1. Each business unit is assessed individually, and therefore configures its own
operations in such a way as to reduce its specific economic exposure
a. This strategy entails a trade-off between increased production costs and
lowered risks
2. Company-wide perspective, whereby a portfolio of businesses and operational
structures is selected with offsetting exposures which balance each other
a. Result of such diversification is a lower total rate of exposure across the
company, even though individual units may continue to have higher levels
of risk on their own
3. Incorporates flexibility in operational planning. The company exploits
fluctuating exchange rates by switching production between factories
a. Again, a trade-off is necessary between the increased costs of carrying
excess capacity (so as to allow production transfers) on the one hand and
reduced economic exposure risks on the other

Managers who cannot set company policy on economic exposure should not be held
responsible for the economic exposure effects of volatile exchange rates. When assessing
the performance of these managers, senior management should reduce their own
bounded rationality problem by adjusting either performances indicators or goal-based
expectations to eliminate the economic-exposure effects on performance of fluctuations
in real exchange rates.
However, these types of administrative adjustments will be insufficient, and real
bounded rationality reduction will require substantial investment in communication.

Chapter 9: International marketing

Theodore Levitt MNEs should not worry very much about customizing to cultural
preferences. Technology has largely homogenized consumer preferences most consumers
simply want quality, reliability and low price Therefore, MNEs should focus on offering
such products and services. MNEs should standardize their products and services
worldwide in order to achieve economies of scale, and should implement global strategies
across all markets.

Levitt sees the multi-centered MNE being gradually replaced by centralized exporters
and international projectors
- Technology, communication and travel have revolutionized commerce and trade,
basically conferring additional value to non-location-bound FSAs, and
strengthening the MNEs ability to deploy and exploit such non-location-bound
FSAs, irrespective of cultural, economic, institutional or spatial distance.

His argument rests on two foundations;
1. Cultures and national societal tastes are not fixed, but are subject of continuous
change, with technology guiding the change to homogenization
a. Cultural preferences follow one of two paths;
i. They eventually lose relevance to economic decision making
ii. Diffuse to other groups and become the substance of global trends.
this is true for commodities and high-tech products but also for
high touch goods (items where personal interaction among
individuals is critical at moment of purchase or during
consumption/usage) and services
Examples: Pizza, pitta bread, jazz, coke, pepsi, McDs, Sony, Levi
2. Building on point 1, converging tastes now allow companies to offer globally
standardized products, harnessing economies of scale to deliver high-quality,
dependable goods and low cost.
a. High quality and low cost are not mutually exclusive objectives:
i. They represent complementary goals achievable through
innovation & efficiency.
The key is standardized products that allow for economies of scale in production, as
well as in downstream activities such as distribution and marketing and in
management activities in general.

No matter how small or niched a product area may be, there are always equivalent
segements in other markets worldwide that allow for a global approach satisfying the
above 3 criteria: quality, reliability and low prices.> so domestic markets are no safe haven

Levitt concedes that administrative heritage and corporate culture play a large role in
determining the success or failure of a firms managerial effect: there is no one reliable
right answer no one formulae.
This warning acts as a reminder that even when adopting a global approach to
marketing, it is effective organization and implementation (i.e. the MNEs routines and
recombination capabilites) that count

Chapter 10: Managing managers in the multinational enterprise
MNEs must develop managers with a broad mental map covering the entirety of the
MNE;s geographically dispersed operations. This is critical to the MNEs long-term
profitability and growth, especially in an era when foreign markets are becoming
increasingly important contributors to innovation and cost reduction at the upstream
end of the value chain, and to overall sales performance at the downstream end.

Managers commanding deep knowledge of internal MNE functioning represent the
MNEs key resource to facilitate international expansion and to coordinate
geographically dispersed, established operations, such managers are best positioned to
- Engage in the international transfer of non-location-bound FSAs from the home
- Identify the need for new FSA development in host countries and facilitate such
- Help combine location-bound and non-location bound FSAs.

Expatriation is the most direct and rigorous way to give managers this in-depth knowledge
of the MNEs internal network, as well as the abilities to transfer routines abroad and be
catalyst for recombining resources.
- It also gives managers valuable experiential knowledge of the pressure for good
faith local prioritization and other types of benevolent preference reversal in
o Which will reduce bounded rationality problems

Black & Gregersens paper describes the alarming findings that nearly 80& of all mid-
to large-sized MNEs send managers abroad at a significant cost to the company;
- 10-20% of US expatriates actually came back home early because of
dissatisfaction or disillusionment and difficulties to a new foreign culture
- >30% did not meet senior management expectations
- Of those who completed 25% ended up leaving the company

Black & Gregersens attribute these unfavourable outcomes to 4 common problems in
how firms manage their expatriates;
1. Senior managers in the home country often underestimate the impact of cultural
distance on organizational functioning and, as a result, do not invest sufiecient in
programmes to select and train properly potential candidates.
2. Responsibility for expatriates is often assigned to human resources managers,
very few of whom have an y international experience
a. little insight in the problems faced and how they remedy them.
3. Senior managemnt in many MNEs view expatriates as being well paid and well
looked after, and therefore as having little to complain about
4. Many MNEs mistakingly assume that expatriates do not need help readjusting
after having returned home, despite the fact that changes will likely have
occurred during their absence.

Black & Gregersens: when it comes to successfully managing expatriate managers, there
are 3 best practices;
1. Focus on creating knowledge and developing global leadership skills
a. Both senior management in the expatriates home country and the
individual sent abroad share a clear understanding of the expatriations
purpose and related expectations.
i. What types of knowledge should be acquired etc.
b. Carefull planning on these issues yield more long-term benefits to both the
company and the employees than expatriate assignments simply geared
towards filling a staffing shortage or business need abroad.
2. Make sure that candidates have cross-cultural skills to match their technical
a. Cross-cultural abilities are often overlooked as companies tend to send
people who are capable but culturally illiterate effective resource
recombination requires a mix of technical and social skills
3. Prepare people to make the transition back to their home offices
a. Devote substantial attention to reintegrating expatriates into their home
country after their assignment
i. Such a process allow effective absorption of the former expatriate
into the home countrys professional and personal environment

The authors suggest that it is the simultaneous adoption of all 3 practises that leads to
successful expatriate management; adopting only one or two of the practices does not
suffice to achieve successful assignments

In addition to outlining the appropriate way to manage expatriate employees, Black &
Gregersen also discuss the required personal characteristics for employees to be high-
potential expatriate prospects. Successful companies look for five characteristics:
1. A drive to communicate
2. Broad-based sociability
3. Cultural flexibility
4. Cosmopolitan orientation
5. Collaborative negotiation style

PART 3: Dynamics of global strategy
Chapter 11: Entry mode dynamics 1: Foreign distributors
Chapter 12: Entry mode dynamics 2: Strategic alliance partners
Chapter 13: Entry mode dynamics 1: Mergers and acquisitions
Chapter 14: The role of emerging economies
Chapter 15: Emerging economy multinational enterprises
Chapter 16A: International strategies of corporate social responsibility
Chapter 16B: International strategies of corporate environmental sustainability