Multinational Stretegic Planning

International Business
Strategy: Rethinking the

Foundations of Global
Corporate Success
Alain Verbeke
Cambridge University Press, 2013
TABLE OF CONTENTS 1
l
Introduction and overview of the books framework
Part one. Core concepts

1. Conceptual foundations of international business
strategy
2. The critical role of firm-specific advantages
3. The nature of home country location advantages
4. The problem with host country location advantages
5. Combining firm-specific advantages and location
advantages in an MNE network
2
TABLE OF CONTENTS (2)

Part two. Functional issues
6. International innovation
7. International sourcing and production
8. International finance
9. International marketing
10. Managing managers in the multinational enterprise

l
Part three. Dynamics of global strategy

11. Entry mode dynamics 1: foreign distributors
12. Entry mode dynamics 2: strategic alliance
partners
13. Entry mode dynamics 3: mergers and acquisitions
14. The role of emerging economies
15. Emerging economy MNEs (EMNEs)
16a. International strategies of corporate social
responsibility
16b. International strategies of environmental
sustainability
4
Chapter One: Conceptual

Foundations of International
Business Strategy
Five learning objectives

1.
2.
3.
To develop an understanding of the seven

concepts of this books unifying framework.
To link specific types of transfers of firm-specific
advantages (FSAs) across borders with the four
corresponding MNE archetypes of administrative
heritage.
To describe the various motivations for foreign
direct investment (FDI) and to explain the linkages
among non-location-bound (or internationally
transferable) FSAs, location-bound (or nontransferable) FSAs and location advantages within
each of the four MNE archetypes.
6

4.
5.
To define the ten often-observed patterns of FSA

development and resource recombination in
international business.
To explain the need for complementary resources
of external actors and the potential reasons for
bounded rationality and bounded reliability when
doing international business.
Definition of
international business strategy
l
International business strategy means effectively and

efficiently matching a multinational enterprises (MNEs)
internal strengths (relative to competitors) with the
opportunities and challenges found in geographically
dispersed environments that cross international borders.
Such matching is a precondition to creating value and
satisfying stakeholder goals, both domestically and
internationally.
The seven concepts of the

unifying framework
l
l
l
l
l
l
Internationally transferable (or non-location bound)

firm-specific advantages (FSAs)
Non-transferable (or location-bound) FSAs
Location advantages
Investment in and value creation through resource
recombination
Complementary resources of external actors (not
shown explicitly in Figure 1.1)
Bounded rationality
Bounded reliability
9
Figure 1.1 Core concepts
Bounded
rationality
Stand-alone
FSAs
Home
Country
Routines
International
border
Re-combination
capabilities
Host
Country
The triangular shape in the model represents

the pyramidal nature of the firms advantages:
on the broad base of the location advantages
(LAs) of its home country (left) it builds a
smaller subset of FSAs that are locationbound (LB; middle), and then a still smaller
subset that are non-location bound (NLB;
right). Bounded rationality and bounded
reliability influence the ability of these nonlocation bound FSAs to be transferred across
the international border to the host country.
Bounded
reliability
Location advantages
home country
Non-transferable (or
location-bound) FSAs
home country
Internationally transferable (or

non-location bound) FSAs
10
The MNEs unique resource base

l
l
l
Physical resources (natural resources, buildings, plant

equipment).
Financial resources (equity and loan capital)
Human resources (individuals and teams, entrepreneurial and
operational skills).
Upstream knowledge (sourcing knowledge, product and
process-related technological knowledge).
Downstream knowledge (marketing, sales, distribution and
after sales service).
Administrative knowledge (organizational structure, culture
and systems).
Reputational resources (reputation for honest business
11
dealings).
The MNEs unique resource base

l
Building upon its resource base, as well as its access

to location advantages, the MNE will develop standalone FSAs (e.g., brand names, patents) and routines,
and will also engage in resources recombination.
FSAs reflect the firms distinct strengths vis--vis
rivals, and are the source of competitive advantage in
the marketplace.
12
Routines
l
The distinct ability to combine further the firms

resources, in unique ways valued by the firms
stakeholders.
Routines are stable patterns of decisions and actions
that coordinate the productive use of resources, and
thereby generate value, whether domestically or
internationally.
The combination ability expressed in routines is a
higher-order FSA.
Case example: Federal Express.
13
Recombination
l
l
Constitutes the heart of international business strategy.

Artful orchestration of resources, especially
knowledge bundles, as a response to differences
between national and foreign environments, and to
satisfy new stakeholder demands in these foreign
environments.
Entrepreneurial judgment is at the heart of the MNEs
recombination capability.
Precondition to value creation and satisfying
stakeholder needs in complex international settings.
14
International transferability of
FSAs?
l
Paradox:
If the FSA consists of easily codifiable knowledge (i.e.,
if it can be articulated explicitly, as in a handbook or
blueprint), then it can be cheaply transferred abroad,
but it can also be easily imitated by other firms.
Though expensive and time-consuming to transfer tacit
knowledge across borders, the benefit to the MNE is
that this knowledge is also difficult to imitate. It is often
a key source of competitive advantage when doing
business abroad.
15
Some FSAs are not transferable

abroad: location-bound FSAs
Four main types:
l Stand-alone resources linked to location advantages
(privileged retail locations).
l Local marketing knowledge and reputational
resources, such as brand names (may not be applicable
to a host country context, or valued to the same extent).
l Local best practices (i.e. routines), such as incentive
systems or buyer-supplier relations (may not work
abroad).
l Domestic recombination capability (may not work in
foreign markets).
16
Some FSAs are not transferable

abroad: location-bound FSAs
l
Even if transferability of the relevant resources were

technically possible, this does not mean the transfer of
the potential for profitable deployment, i.e., the
resource bundles that may be transferable from a
technical perspective (e.g., the way in which a product is
marketed at home), do not constitute an FSA abroad.
17
Location advantages
l
Entire set of strengths of a location, and accessible by

firms in that location.
Should always be assessed relative to the strengths of
other locations.
Instrumental to FSAs.
18
Motivations for foreign expansion

l
l
l
l
Natural resource seeking.

Market seeking.
Strategic resource seeking.
Efficiency seeking.
19
Figure 1.2 The essence of international business strategy
Home Country
International
border
Stand-alone
FSAs
The shading of the middle of the

host country triangle emphasizes the
importance of developing new, LB
FSAs in the host country. These LB
FSAs complement the FSAs the
firm has transferred from the home
country, and are critical to achieve
the firms goals, in terms of
accessing and benefiting from the
location advantages (LAs) of the
host country. If the firm commands
insufficient FSAs internally to
access and benefit from these LAs,
it may draw upon complementary
resources of external economic
actors to achieve its goals in the
host country.
Host Country
y
tar
en
m
s
le
e
mp urc
Co reso
Routines
Re-combination
capabilities
Internationally
Location advantages Non-transferable (or
location-bound) FSAs transferable (or nonhome country
location bound) FSAs
home country
Internationally
transferable (or nonlocation bound) FSAs
host country
Location advantages
host country
20
Four MNE archetypes:

1. Centralized exporter
l
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.
Case example: motion picture studios.
21
Figure 1.3 Centralized exporter
Home Country
International
border
Host Country
The arrow cutting through dotted

areas represents the direct link
between home country NLB
FSAs, and the host countrys
LAs (i.e. the foreign market),
without development of new, LB
FSAs in the host country, or
formal transfer of existing NLB
FSAs to the host country (the
NLB FSAs are embodied in the
centralized exporters products).
Internationally
location-bound) FSAs transferable (or nonhome country
home country
location bound) FSAs
Internationally
Non-transferable (or Location advantages
transferable (or non- location-bound) FSAs host country
location bound) FSAs host country
22

2. International projector
l
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 abroad.
Case examples: Ford, Disney.
23
Figure 1.4 International projector
Home Country
International
border
Host Country
The dotted area of LB FSAs in

the middle of the host country
triangle reflects the international
projectors lack of development
of LB FSAs in the host country,
where operations simply clone
those prevailing in the home
country. Extant NLB FSAs
suffice to access and benefit
from host country LAs.

home country
home country
Internationally
Internationally
Location advantages
location-bound) FSAs host country
host country
24
Four MNE Archetypes:

3. International coordinator
l
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.
Case example: BP.
25
Figure 1.5 International coordinator
International
border
Host
Country A
Home
Country
Host
Country B
The different sizes of the shaded

areas in the various host countries
reflect the different types and levels
of home country NLB FSAs to be
transferred to different host
environments in function of the LAs
the firm wishes to access. The circle
linking the various countries reflects
the international coordinators
strengths in putting together a value
chain based upon access to the
coveted LAs of each country where
the firm operates.
Host
Country C
26

4. Multi-centred MNE
l
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 these
firms together are minimal: common financial
governance and the identity and specific business
interests of the founders or main owners.
Case examples: Philips, Lafarge.
27
Figure 1.6 Multi-centered MNE

International
border
Host
Country A
Stand-alone
FSAs
Home
Country
Host
Country B
Routines
Re-combination
capabilities
The multi-centered MNE

transfers only key routines
from the home country to host
countries. The large, shaded
middle areas in the host
countries represent the
necessity to build new, LB
FSAs in each host country. The
double-headed arrows reflect
the close alignment the host
country operations must
develop between their own LB
FSAs and the hosts LAs.
Host
Country C
28
MNE strategy in practice

l
Most large, established MNEs with sophisticated

international operations do not simply conform to a
single archetype, even if in-depth knowledge on their
foundation and early history will typically allow
positioning them as one of the four archetypes.
As firms grow internationally, several patterns of FSA
development and transfer can typically be identified in
single firms, see Figure 1.7.
29
Figure 1.7 Ten patterns of FSA development in MNEs

Generic FSA-type
Geographic
source
Internationally transferable
(Non location-bound) FSAs
Non-transferable
(location-bound) FSAs
II
Home country
operation
I
III
VI
+
Host country
operation
IV
V
VII
+
IX
Network
VIII
X
Key:
Non-transferable (location-bound) FSAs

Internationally transferable (Non
Explicit headquarters control
Reflects FSA upgrading from LB to NLB
Reflects NLB FSA transfer
Reflects corporate headquarters control
30
Complementary resources of
external actors
l
Needed from external actors (technology providers,

licensees, local distributors, joint venture partners, etc.)
to be successful abroad.
Reason: cultural, economic, institutional and spatial
distance (meaning: missing success ingredients).
Conditions: (1) attempts at internal development
would lead to lower NPV or are not feasible; (2) external
actors are able and willing to provide the resources.
31
Bounded rationality
Scarcity of mind: managers responsible for making
decisions and engaging in purposive action in the firm
always face information problems:
l One source is poor access to information sufficient in
quality and quantity.
l Another source is the limited mental capability to
process complex information bundles.
l Example of Xerox and Fuji-Xerox.
32
Bounded reliability
Scarcity of effort to make good on open-ended promises
l One source is opportunism (ex-ante false promises;
ex-post reneging on promises).
l A second source is benevolent preference reversal
(e.g., good faith local prioritization: distance in time
from punishment; distance in space from the
headquarters monitoring apparatus; proximity to - and
intrinsic satisfaction from - focusing on local opportunities
with immediate local rewards. Scaling back on
overcommitment).
l Need for safeguards.
33
Bounded rationality versus

bounded reliability
l
Bounded rationality is about the imperfect

assessment of a present or future state of affairs,
thereby leading to incorrect beliefs; bounded reliability is
about imperfect effort towards pre-specified goal
achievement, thereby leading to incomplete fulfilment of
promises.
34
Key questions in international

business strategy (1/2)
l
What is our distinct resource base, including

elements of our administrative heritage, that provides
internationally transferable FSAs?
Which value-added activities in which foreign
location(s) will permit us to exploit and augment to the
fullest our distinct resource base?
What are the expected costs and difficulties we will
face when transferring this distinct resource base?
What specific resource recombination (associated
with each alternative foreign entry and operating mode)
will be required so as to make the proposed
international value-added activities successful?
35
Key questions in international

business strategy (2/2)
l
Do we have the required resource recombination

capability in-house?
What are the costs and benefits of using
complementary resources of external actors to fill
resource gaps?
What are the main bounded rationality and bounded
reliability problems we will face when extending the
geographic scope of our firms activities, given the
changed boundaries of the firm, the changed linkages
with outside stakeholders and the changes in our internal
functioning?
36
Chapter Two: The Critical Role of

Firm-Specific Advantages (FSAs)
C.K. Prahalad and G. Hamel,
'The Core Competence of the Corporation',
Harvard Business Review 68 (1990), 79-91

1.
2.
3.
4.
5.
To describe the four characteristics of core

competencies, which are higher-order FSAs.
To explain the importance of the firms strategic
architecture in the context of core competencies.
To develop an understanding of influence of an
industrys national environment on competitive
positioning strategies and firm-level core competencies.
To identify the bounded rationality problems
associated with an MNE expanding internationally and
trying to transfer its FSAs across borders.
Based on the conceptual framework in Chapter 1, to
analyze the managerial implications of an illconceived sole focus on core competences.
38
Focus on higher-order FSAs

l
Firm is a portfolio of core competencies: higher-order

FSAs, i.e., the firms routines and recombination
capabilities.
A core competence ultimately takes the form of: shared
knowledge, organized into routines, nd the ability to
integrate multiple technologies, reflecting the
recombination of internal resources.
Routines/recombination abilities are at least parly
'carried' by key employees (so-called competence
carriers) that can be deployed across business units.
39
Characteristics of a
core competence
l
l
l
Difficult for competitors to imitate (internal coordination

and learning).
Provides potential access to wide variety of markets.
Makes a significant contribution to perceived customer
benefits from the end products.
We add a fourth characteristic: the loss of a core
competence would have an important negative effect on
the firms present and future performance, in terms of
value creation and satisfying stakeholder objectives.
40
Organizational implications
l
Senior management should not just make strategic plans

with growth and profitability targets for the firms product
lines and SBUs, but it should also develop a strategic
architecture (road map) to guide the corporation in
building and acquiring core competencies.
Necessary to overcome the challenge of decentralized
SBUs acting in their own self-interest.
Senior management should reallocate competence
carriers, with deep knowledge of routines and
instrumental to resource recombination across functional
and business units so as to yield the highest return for
the firm as a whole .
41
Dangers of outsourcing
l
The company must have a clear understanding of the

FSAs it is trying to build through the outsourcing
partnership, and those it is seeking to protect from being
transferred to potential competitors.
Outsourcing of e.g., key components in manufacturing,
as a shortcut to increase short-term profitability, may
lead to the loss of FSAs.
42
Context First complementary

perspective (1/2)
l
William G. Egelhoff (SMR): contrasts mainstream

Japanese and US approaches to strategy
(semiconductor firms).
US firms: short-term profitability considerations lead to
frequent repositioning of products, the rapid move to
licensing standardized products, and exit from niches
with strong price competition.
Japanese firms: focus on improving process technology
for standard products and have a long-term perspective.
43

perspective (2/2)
l
l
l
US-approach effective in industries with fundamental

technological change and related commercial
breakthroughs: not fine-tuning strategy implementation
counts (as in Japanese firms), but the correct
anticipation of future dominant industry standards,
and rapid profit building by attracting buyers to
customized niches.
Different industries require different FSA types
Implication: Japanese firms may be better equipped to
adopt a core competence approach.
44
Context Second
complementary perspective (1/3)
Andrew Bartmess and Keith Cerny (CMR):
l
Often two wrong assumptions when attempting to
access host country location advantages in
manufacturing.
l
The validity of the two assumptions should be checked
when thinking about exploiting core competences
abroad:
1. Manufacturing knowledge is a stand-alone FSA.
2. This FSA can be effortlessly recombined with foreign
location advantages.
45
Context Second
Reality:
1.
Knowledge in a single functional area (R&D or
marketing) is not a core competence: this involves
combining stand-alone knowledge bundles found in
different functions into routines. Thus: co-location is
important.
2.
There are complexities involved in successfully
exploiting and further augmenting FSAs abroad
(importance of managing the required linkages).
46
Context Second
Five criteria to assess the need for co-locating activities
instrumental to further recombination:
1.
Complexity of information to be transferred.
2.
Required level of interaction: higher uncertainty and
need for two-way information flows (mutual
adjustment).
3.
Similarity of background and expertise of people
involved at home and abroad.
4.
Prior relationships affecting communication on
sensitive issues.
5.
Concreteness of information (emotions, feelings,
cultural values embedded?).
47
Management Insights
l
l
Prahalad and Hamel: Limited to Pattern I in Figure 1.7

Focus on bounded innovation and emprisoned
resources in SBUs.
Essence of Prahalad and Hamels view: Figure 2.1.
48
Figure 1.7 Ten patterns of FSA development in MNEs

Generic FSA-type
Geographic
source
Non-transferable
II
Home country
operation
I
III
VI
+
Host country
operation
IV
V
VII
+
IX
Network
VIII
X
Key:

49
Figure 2.1. Non-location bound (or internationally

transferable) FSAs as drivers of economies of
scope across markets and products
International
border
Host
Country A
Home
Country
Host
Country B
The shading of the NLB FSA

area in the home country and the
dotted outline of the rest of the
home country triangle indicate
the emphasis on NLB FSAs and
the assumed irrelevance of home
country LAs and LB FSAs in this
model. The dotted middle section
of the triangle in each host
country reflects the lack of
emphasis on the development of
LB FSAs by host country
operations. Extant NLB FSAs
suffice to access and benefit from
host country Las.
Host
Country C
50
Five main weaknesses

1)
2)
3)
Location advantages? FSA-transfer costs Locationbound FSAs? A strategic architecture alone will not
lead to successful exploitation of core competences
abroad.
Geographical embeddedness of competence
carriers? Co-location matters here too.
Nave view of corporate headquarters versus SBU
relationships (idem versus subsidiaries). In practice,
FSA transfer is very difficult (cf. concept of subsidiaryspecific advantage in Chapter 1).
51

4)
5)
Nave preference for hierarchical control and

centralized decision-making. In practice,
multidivisional governance economizes on bounded
rationality and bounded reliability.
Neglect to distinguish between the back end and
customer end of the value chain. Especially the
latter needs adaptation in function of location; if not
core competences will become core rigidities.
52
Five management takeaways

1.
2.
3.
4.
5.
Identify and nurture your companys core

competencies, and differentiate their treatment from
that given to less critical FSAs.
Develop a strategic architecture to guide your
company in building and acquiring core competencies.
Understand the economic potential and drawbacks of
acquiring FSAs through external strategic alliances.
Do not overestimate the transferability of your FSAs
across borders, and understand the costs of
successful resource recombination.
Reflect on co-location requirements when expanding
internationally and investing abroad.
53
Chapter Three:
The Nature of Home Country
Location Advantages
Michael E. Porter
The competitive advantage of nations,

1.
2.
3.
4.
5.
To describe the relationship between a firms strengths

relative to international rivals and the competitiveness of
its home country.
To explain Porters diamond and the interaction among
the four diamond attributes.
To develop an understanding of the different
international expansion trajectories of newly
established firms.
To identify the role of diamond connectors in the
context of location advantages held by different countries.
To discuss the managerial relevance of a national
diamond-based analysis on the competitive advantage
55
of nations.
Porters diamond
l
Any companys ability to compete internationally is

based on location advantages in its home country.
Pressure in the home base pushes innovation and
upgrading, resulting in FSA creation.
It is the interaction among four sets of parameters that
counts.
56
Porters diamond
l
Factor conditions: focus on created factor conditions

(skilled labour, scientific knowledge and infrastructure)
that are specialized.
Demand conditions: size and sophistication of
domestic demand.
Related and supporting industries (world class
suppliers).
Firm strategy, industry structure, and rivalry: highly
competitive domestic industry helps international
competitiveness.
57
Porters diamond
l
Home country diamond cannot be identified for a

national or regional economy as a whole, but only for
specific industries.
Industry-specific pressures lead to innovation and
productivity improvements.
Findings resulted from four-year study over 100
industry groups in ten nations (Denmark, Germany,
Italy, Japan, Korea, Singapore, Sweden, Switzerland,
the United Kingdom and the United States).
Empirical work was aimed mainly at validating, not
testing, the diamond framework.
58

perspective
l
Walter Kuemmerle (SMR): entrepreneurspath to

global expansion.
Early internationalization usually entails low-cost, lowrisk experiments in neighbouring countries, whereby the
firms mix of internationally transferable knowledge and
location-bound knowledge requires only incremental
change.
Two patterns of more aggressive international
expansion: exploitation of substantial cross-border
opportunities in output markets and tapping into foreign
input markets for resources such as (venture) capital.
More to competitive success than domestic diamond
conditions, even at the early stages of firm growth.
59
Context Second
l
David Teece (CMR): inward FDI in Silicon Valley.

Porter-type, single diamond thinking breaks down
when foreign investors provide resources, instrumental
to domestic, firm-level sustainability and expansion.
Foreign MNE activity through inward FDI acts as a
bridge between the location advantages of two different
nations.
60
Context Second
l
Japanese investors bring FSAs derived from the

Japanese diamond: patient capital, engineering talent,
manufacturing excellence, and access to the Japanese
market
Japanese companies benefit from unique access to US
entrepreneurial capabilities, early-stage technology
developments in innovation-driven sectors, and a more
general window on new trends
Japanese companies can take risks unacceptable in
Japan and gain privileged access to US distribution
channels
61
Context Second
l
Effective melding of location advantages of US and

Japanese diamonds through Japanese FDI in Silicon
Valley is not easy: long-term efforts required to
develop personal relationships between Japanese
and US actors as diamond connectors.
62
Management Insights
l
Porter has a narrow view on FSA creation: home

country national diamond attributes determine a firms
innovation capabilities and related productivity
improvements.
The MNE is either a centralized exporter or an
international projector.
Porter implicitly rejects the relevance of a multi-centred
MNE or an international coordinator.
63
Figure 3.1 Domestic diamond determinants as drivers of

home-base location advantages, and subsequent FSAs
Where the domestic diamond
is strong (pictured here as a
large diamond), this model
predicts the creation of NLB
FSAs will be stimulated,
while this will not occur
where the diamond is weak
(pictured here as a small
B
Weak
LAs
A domestic C
LAs
LB FSAs
diamond
diamond).
Strong domestic
diamond
LAs
LAs
LB FSAs
LAs
LB FSAs Non-LB FSAs
D
A. Factor conditions
B. Related and supporting industries
C. Demand conditions
D. Firm strategy, industry structure, and rivalry
Home
country
Host
country
64
Figure 3.2 Porters analysis of FSA development in MNEs

Generic FSA-type
Geographic
source
Non-transferable
II
Home country
operation
Host country
operation
Network
Key:

65

1.
EU and NAFTA cases suggest a double diamond (or

multiple diamond): important to the FSA development
process.
66
Figure 3.3 Porters single diamond model

and the double diamond model
Canada
The single diamond
LAs
Canada
International
border
LAs
USA
USA
The double diamond
LAs
Canada
NAFTA
LAs
USA
With the single diamond model, the home country LAs determine whatever FSAs a company may
develop. With the double diamond model, firms also draw on LAs of other nations than the home
country to strengthen their own FSAs. Trade and investment liberalization (as with NAFTA)
institutionalizes this possibility of freely accessing and drawing upon the resources present in a host
country diamond to strengthen FSAs. This is why the trapezoids representing Canadian and US
location advantages are shown as being similar in size, though NAFTA obviously does not eliminate
completely country borders.
67

2. Inward FDI as a force for upgrading a local economy
is neglected.
Porter neglects a countrys location advantages being
instrumental to inward FDI (rather than only outward
FDI).
68

3. Porter ignores the need for location-bound FSAs in
host countries.
Assumes that FSA development depends initially on
domestic market factors, but can then be decoupled
from the home location, Pattern II in Figure 1.7.
69

4. Porters framework is tautological:
l Selective factor disadvantages may actually drive
domestic innovation and upgrading.
l Ex post, success follows from strong home country
determinants, unless some of these determinants
happen to be weak, in which case they are interpreted
as selective factor disadvantages that have pushed
domestic firms to overcome this weakness through
innovation.
70

5. Porter places too much emphasis on the country as the
appropriate geographic level of analysis.
Wrong assumption that an MNE has unconstrained
access to location advantages in the home country
diamond and also host country diamonds are largely
off-limits.
71
Figure 3.4 A multi-level analysis of

the diamond determinants
Related and supporting

industries
Local
State/provincial
National
Foreign
Global
Strengths
Weaknesses
Opportunities
Threats
Factor conditions
Local
State/provincial
National
Foreign
Global
Strengths
Weaknesses
Opportunities
Threats
Demand conditions
Competitive performance
Local
State/provincial
National
Foreign
Global
Strengths
Weaknesses
Opportunities
Threats
Firm strategy, industry

structure, and rivalry
Local
State/provincial
National
Foreign
Global
Strengths
Weaknesses
Opportunities
Threats
72

1. Apply the diamond framework to evaluate the sectoral
strengths and weaknesses of your domestic industry.
2. Reflect on the relevance of national diamond
characteristics to explain the short- and long-term
competitiveness of your own firm.
3. Define industry-specific pressures that can
strengthen your FSAs through absorbing or building
upon the complementary resources present in your
industry environment.
73

4. Analyze the economic potential of foreign diamonds,
i.e., foreign input markets for providing resources to
your firm, and foreign output markets for absorbing its
end products.
5. Assess the suitability of the diamond framework for
analyzing your industry and adjust/add determinants
and sub-factors according to your firm-specific needs.
74
Chapter Four: The Problem with

Host Country Location
Advantages
Pankaj Ghemawat,
Distance still matters: The hard reality of
global expansion
Harvard Business Review 79 (2001), 147

1.
2.
3.
4.
5.
To describe the four main distance dimensions

(cultural, administrative, geographic and economic) in
the context of host country location advantages.
To link these various dimensions of distance to
bounded rationality problems faced by MNEs.
To develop an understanding of the alternative
perspective of distance as an opportunity, rather
than a problem.
To highlight the importance of paying sufficient
attention to the challenges posed by high-distance
markets.
To identify the managerial implications of distance
for the international transferability of FSAs.
76
Distance components
l
l
l
l
Cultural distance
Administrative (or institutional) distance
Geographic (or spatial) distance
Economic distance
77
Case study:
Tricon (now YUM! brands)
l
When the four dimensions of distance are factored-in

to complement traditional country portfolio analysis, a
revised and more accurate picture of the
opportunities and risks becomes clear.
Countries with lower distance vis--vis the United
States, such as Mexico and Canada become top
choices. Those that are seemingly attractive in terms of
market size and growth, including Japan and Germany,
become less so.
78
Context - First complementary

perspective (1/2)
Vestering, Rouse and Reinert (SMR):
l Focus is on the benefits of accessing multiple, high
distance input markets. Ghemawat focused on the
risks of too many high distance output markets.
l Large MNEs should compose a portfolio of offshoring
countries based upon a particular bundle of location
advantages offered by each country.
79

perspective (2/2)
l
FSA in offshoring: strategic offshoring decisions are not

left to individual business units, but are taken centrally,
to create cost advantages by pooling resources, jointly
developing new suppliers or expanding economies of
scale in low-cost countries.
Substantial investments in location-bound FSAs,
including local logistics, engineering and manufacturing
capabilities, prior to actual local production.
80
Context Second
complementary perspective
l
Schmitt and Pan (CMR) focus on cultural distance when

penetrating high distance Asian markets.
Attention to selecting the right corporate and product brand
names e.g., realizing that characters are meaningful
linguistic units in Asian languages.
Much attention should be devoted to creating the right
corporate image. More important than the image for an
individual product.
Quality perceptions are important and comparative
advertising is inappropriate.
Much sophistication is required of the Western
companies recombination capability to overcome
81
distance.
Management Insights
l
Ghemawat clarifies that the international exploitation

potential of FSAs depends upon the type and level of
distance among countries.
Because of bounded rationality, managers often
overestimate the international profit potential of their
companies FSAs, and underestimate the efforts
required to penetrate international markets.
82
Figure 4.1 The MNEs diminishing stock of internationally

transferable FSAs as a function of Distance
Greater distance leads to
weaker transferability and
exploitation potential of
NLB FSAs, as indicated by
the smaller NLB FSA
triangles.
Non-LB FSAs
LAs
LB FSAs
Non-LB
FSAs
Non-LB FSAs
Non-LB
FSAs
Domestic base
Distance to foreign markets
83
Figure 4.2 The need for LB FSAs as a function of Distance

Greater distance leads
to higher investment
requirements in LB
FSAs, as indicated by
the larger size of the LB
FSA trapezoids
LB FSAs
LAs
LB FSAs
Non-LB FSAs
LB FSAs
LB FSAs
Domestic base
Distance to foreign markets
84
Figure 4.3 Ghemawats perspective of

FSA development in MNEs
Generic FSA-type
Geographic
source
Non-transferable
Home country
operation
III
+
Host country
operation
Network
Key:

85
Five limitations
1. Macro-level distance may be an important explanation
for lack of success in a foreign market, but only reflects
a macro-level reality.
Investments required to develop location-bound FSAs in
a foreign market will be different for each company (e.g.,
US-based company with senior managers from Taiwan
expanding to Taiwan).
86
Five limitations
2. Higher distance does not necessarily mean reducing
geographic scope:
l Design elements can foster a stronger recombination
capability, e.g., higher functional diversity of senior
management.
l MNE should build into its human resources base and
key decision making routines a deep knowledge on
foreign markets.
87
Five limitations
3. The impact of macro-level distance may be very
different in the various value chain activities, especially
input versus output markets, e.g., Levi Strauss.
Ghemawats analysis is appropriate for centralized
exporters and international projectors, but less so for
international coordinators.
88
Five limitations
4. With strategic asset seeking investment, a high
distance location, though creating high costs for the
firm, may also be instrumental to learning
opportunities unavailable in low distance locations.
Managerial prescription of reduced geographic
scope is not equally valid for all foreign entry
motivations.
89
Five limitations
5. Ghemawats model does not address cooperative
agreements to address the distance challenge.
Complementary resources may reduce distance.
90

1. Pay attention to the four key dimensions of
distance when evaluating the attractiveness of
foreign markets.
2. Analyze your companys position in the realm of cost
leadership and thereby your potential (or need) to
develop an FSA in offshoring.
3. Consider the right corporate and product brand
names, the right image and the creation of the right
perception of quality when launching branded
consumer goods in high-distance markets.
91

4. Reflect on the transferability, deployability and
profitable exploitation of your FSAs across borders,
as well as on the need to create new FSAs, and on the
possibilities of resource recombination. Do not
overestimate the profit potential abroad of FSAs that
worked well at home.
5. Before making a final decision about entry in potential
host markets, do assess several firm- and host countryspecific characteristics, which amount to distance:
evaluate whether strong but hypothetical profit
potential in foreign markets can actually be
achieved in practice, given the presence of distance.
92
Chapter Five: Combining Firm-Specific

Advantages and Location Advantages
in a Multinational Network
C.A. Bartlett and S. Ghoshal

Tap your subsidiaries for global reach
Harvard Business Review 64 (1986), 87-94.

1.
2.
3.
4.
5.
To describe the challenges of centralizing strategic

decision making and control in MNEs, and to highlight the
possible ineffectiveness thereof.
To develop a framework for classifying subsidiaries as
a function of the location advantages they can access and
the unique bundles of FSAs they command in specific
value chain activities.
To foster reflection on the procedural justice concept
and its impact on organizational effectiveness.
To outline the strengths and weaknesses of prevailing,
Japanese MNE subsidiary management.
To highlight the managerial implications of assigning
94
differentiated roles to MNE subsidiaries.
Roles of subsidiaries
Two common, wrong assumptions made by senior MNE
management:
1) United Nations model of multinational management:
treat each subsidiary in a similar manner.
Implies either subsidiary independence (multi-centered
MNEs) or complete dependence (global exporters or
international projectors).
2) Headquarters hierarchy syndrome: corporate
headquarters rule (only valid in case of complete
dependence of subsidiaries).
l
95
Dysfunctional effects on the MNE

l
First assumption: important markets and subsidiaries

are treated in the same way as unimportant ones, and
therefore the opportunities they provide are not
optimally exploited.
Second assumption: subsidiaries with a distinct,
specialized resource base are unable to escape from an
implementer role, and loose their entrepreneurial
motivation.
96
Solution 1
l
An organizational model of differentiated rather than

homogenous subsidiary roles and of dispersed rather
than concentrated responsibilities.
Examples: EMI, P&G.
97
Solution 2
Simple normative model as a response to differentiated
subsidiary role requirement:
1) Assess each market according to its strategic
importance.
2) Rate each subsidiarys resource base in terms of
sales and marketing achievements, production
capabilities, research and development, or any other
strength contributing to competitiveness.
l
98
Figure 5.1 A classification of subsidiary roles in the MNE
High
Low
High
Strategic
importance of
the local market
Low
Resource base of
the subsidiary
99

perspective (1/3)
l
W. Chan Kim and Rene Mauborgne (SMR): MNE

corporate headquarters, faced with the need to make
difficult, centralized strategic management decisions,
often in the resource allocation sphere, frequently
demotivate subsidiary managers rather than bringing
out the best in them.
Subsidiary managers attach substantial importance to
due process, i.e., to the way strategic decisions are
made, irrespective of the outcome.
100

perspective (2/3)
Five simple principles of procedural justice:
1.
2.
3.
4.
5.
Corporate headquarters familiarity with the local

situation at the subsidiary level
Effective two-way communication between corporate
headquarters and subsidiaries
Consistency in decision-making across subsidiaries
Possibility for subsidiary managers to challenge the
dominant perspective at corporate headquarters
Transparent explanation of final decisions made by
corporate headquarters
101

perspective (3/3)
Rationale for procedural justice:
1. Due process is as an attempt to reduce bounded
rationality.
2. The outcome of due process is a reduction of
bounded reliability problems.
102
Figure 5.2 The impact of procedural justice
High
Subsidiary benefiting
from favorable resource
allocation decisions
Commitment
Trust
Compulsory
execution
Subsidiary facing
unfavorable resource
allocation decisions
Low
Low
Procedural
justice
High
103
Context Second
l
Anant Neghandi, Golpira Eshghi and Edith Yuen

(CMR): Japanese MNEs face serious problems in
subsidiary management.
104
Context Second
Five main problems:
1. Japanese MNEs adopt a centralized, autocratic
approach vis--vis their foreign subsidiaries.
2. Japanese MNEs have little confidence in
subordinate, non-Japanese managers.
3. Relationships of trust are confined to a few key
managers.
4. Japanese staffing policies are ethnocentric.
5. Japanese MNEs discriminate against women and
minorities.
105
Context Second
Conclusions:
1. Strong FSAs in technology, production and government
relations do not necessarily imply the MNE has strong
capabilities to manage a foreign subsidiary network.
2. United Nations approach and headquarters-hierarchy
syndrome prevent many Japanese MNEs from
developing strategic leader subsidiaries.
106
Management Insights
Bartlett and Ghoshal suggest that firms need to move
beyond the conventional global exporter, international
projector and multi-centred MNE models (they neglect
the existence of the international coordinator model).
107
Strategic leader
Figure 5.3 MNE resource base subsidiaries
as driving factor
Contributor
LAs
LB FSAs
Non-LB FSAs
Implementer
Each type of subsidiary builds upon a

different configuration and level of
LAs, LB FSAs and NLB FSAs, as
reflected by the different sizes of the
segments in each triangle. The doubleheaded arrows reflect cases where the
flow of NLB FSAs is two-way. Here,
subsidiaries can play a key role in
driving international FSA transfers
(which could also occur between
subsidiaries).
Black hole
Domestic base
Foreign markets
108
Figure 5.4 Bartlett and Ghoshals perspective on FSA development in MNEs

Generic FSA-type
Geographic
source
Home country
operation
Non-transferable
I
III
VI
IV
Host country
operation
Network
Key:

109
Management Insights
Limitations
1. After subsidiary roles have been allocated,
valuable subsidiary initiatives often arise in spite
of narrow charter.
Key challenge is not to classify subsidiaries in four
categories, but to craft routines allowing valuable
initiatives to arise bottom-up and to provide support
for such initiatives.
In other words: the key challenge is to identify what
constitutes valuable knowledge?
110
Management Insights
Best practices increase the likelihood that subsidiary
initiatives will come to fruition:
a.
b.
c.
d.
Giving seed money to new initiatives.

Formally requesting proposals.
Using subsidiaries as incubators, avoiding. harassment
by the corporate immune system
Creating internal subsidiary networks.
111
Management Insights
2) The importance of host country environments as input
markets and output markets are wrongly equated;
articles focus is almost solely on output markets:
l For access to foreign input markets, the MNE must rely
on subsidiary capabilities at the upstream end
(technology, sourcing).
l Many subsidiary roles are defined primarily by the
input market, not the output market in foreign nations,
and by upstream FSAs, rather than downstream ones.
112
Figure 5.5 Unbundling subsidiary roles in Bartlett and Ghoshal (1986)
High
Strategic
importance of the
local market as
market for inputs
Low
High
Strategic
importance of the
local market as
market for outputs
Low
High
Upstream subsidiary
competencies
Figure 5.5 A
Low
Low
High
Downstream subsidiary
competencies
Figure 5.5 B
113
Management Insights
3) Bartlett and Ghoshal do not address fully subsidiary
role dynamics, especially after regional integration
schemes:
a) Increase in overlap among markets as a result of
regional integration.
b) Increased internal competition among subsidiaries in
cases of strong regional market unification and
capability commodification.
114
Figure 5.6 The impact of regional integration on subsidiary dynamics
High
Regional
unification of
national
environments as a
market for inputs
Low
High
Regional
unification of
national
environments as a
market for outputs
2
Low
High
Commodification of upstream
subsidiary competencies
Figure 5.6 A
Low
Low
High
Commodification of downstream
subsidiary competencies
Figure 5.6 B
115
Figure 5.7 New organizational structure at Nestle proposed in 2004
Regionally managed
Businesses
Locally managed
Businesses
Zone Executive Officer
Market
Market Business
Business
Executive
Manager
Division
Manager
Global Business Executive Officer
Regional Business
Zone Business Head/

Regional Business Head
Market Head
Country
Manager
Globally managed
Businesses
Market
Market
Business
Head
Regional
Business
Global
Business
Regional
Business
Head
Global
Business
Head
Country
Country
Business
Country
Business
Product Unit
Manager
Country
Business
Manager
Country Business Manager
116
Source: Nestle company website

1.
2.
3.
4.
5.
Assess the current organizational structure and decisionmaking processes in your firm and reflect on the different
roles performed by your subsidiaries.
Classify your portfolio of subsidiaries as a function of the
strategic importance of each market where they operate and
the resource base they command.
Respect the five components of due process in each
corporate head office decision that will affect subsidiaries.
Review the main problems faced by many Japanese
MNEs and learn from their mistakes.
Analyze best practices (inside your firm and industry) for
FSA development in subsidiaries and reflect on the key
drivers of subsidiary roles and dynamics.
117
TABLE OF CONTENTS 1
l
Introduction and overview of the books framework
Part one. Core concepts

1. Conceptual foundations of international business
strategy
2. The critical role of firm-specific advantages
3. The nature of home country location advantages
4. The problem with host country location advantages
5. Combining firm-specific advantages and location
advantages in an MNE network
118

Part two. Functional issues
6. International innovation
7. International sourcing and production
8. International finance
9. International marketing
10. Managing managers in the multinational enterprise
119

l
Part three. Dynamics of global strategy

11. Entry mode dynamics 1: foreign distributors
12. Entry mode dynamics 2: strategic alliance
partners
13. Entry mode dynamics 3: mergers and acquisitions
14. The role of emerging economies
15. Emerging economy MNEs (EMNEs)
16a. International strategies of corporate social
responsibility
16b. International strategies of environmental
sustainability
120
Chapter Six:
International Innovation
Walter Kuemmerle
Building effective R&D capabilities
abroad

1. To explain R&D decentralization and describe the
difference between home-base-exploiting and homebase-augmenting innovation sites.
2. To highlight the key stages in the development of foreign
R&D units.
3. To explain subsidiary initiatives in the innovation sphere
and the functioning of the corporate immune system,
geared towards destroying such initiatives.
4. To foster understanding on how to access another firms
knowledge base and create upstream FSAs.
5. To examine the potential conflicts between host country
research sites and the corporate office.
122
Significance (1)
l
l
-
Many MNEs are moving from centralizing R&D in the home

country towards building international networks where
foreign R&D laboratories fulfill specific roles.
Two main reasons:
Need for presence in knowledge and innovation clusters
(input side), and
Commercial requirement of moving quickly from
innovation to market (output side) so that MNEs must
integrate R&D facilities more closely with host country
manufacturing.
123
Significance (2)
Kuemmerle observed the internationalization of the R&D
function:
l Two distinct types of R&D facilities: home-base exploiting
sites and home-base augmenting sites.
l Home-base exploiting sites supporting manufacturing
facilities in foreign countries or to adapt standard products to
the demand there, with information flows to the foreign
laboratory from the central lab at home.
l Home-base augmenting sites have information flows from
the foreign laboratory to the central lab at home.
124
Significance (3)
l
Home-base exploiting labs: close to key markets and

MNEs foreign manufacturing units.
Initial leadership in the hands of highly regarded managers
from within the company intimately familiar with the
companys culture and systems to forge close ties between
the new labs engineers and the foreign communitys
manufacturing and marketing facilities.
Bounded rationality problem reduced by these labs:
lowering of distance between home-country R&D and
host-country manufacturing.
125
Significance (4)
l
Home-base augmenting operations in critical knowledge

clusters to tap into new sources of innovations.
Initial senior managers should be prominent local
scientists to nurture ties between the new site and the
local scientific community.
Main bounded rationality problem is the subsidiary cannot
access knowledge in foreign locations without becoming
an insider.
126
Significance (5)
l
Ideal profile of foreign R&D unit leaders, instrumental to

knowledge recombination:
Four qualities:
(1) respected scientists or engineers and skilled managers;
(2) able to integrate the new site into the companys
existing R&D network;
(3) comprehensive understanding of technology trends;
(4) able to overcome formal barriers when seeking
access to new ideas in local universities and scientific
communities.
127
Significance (6)
l
Example of Xerox home-base-augmenting site in

Grenoble, France.
Xerox hired a renowned French scientist instrumental to
recombining the firms existing FSAs with complementary
resources in the French environment.
New staff visited other company R&D centers in order to
expedite the labs integration (transfer of NLB FSAs)
128
Significance (7)
l
Example of Eli Lillys home-base exploiting lab in Kobe,

Japan.
Senior research manager with extensive knowledge of both
production and marketing activities was selected as leader.
Existing R&D scientists were assigned to the new location and
new staff visited the other labs (resource recombination)
129
Significance (8)
l
Example of Matsushita: international R&D knowledge

network consisting of both knowledge exploiting and
augmenting labs.
Units communicate directly with each other: facilitates and
increases knowledge transfer and resource recombination.
R&D managers meet on a regular basis: international
transfer of non-location-bound FSAs in multiple directions.
130

perspective (1/5)
l
The combination of international transferability of FSAs and

international access to resources with the need to have
value added operations physically embedded in specific
locations to reap the full benefits of clusters is the sticky
places in slippery space paradox.
131

perspective (2/5)
l
Julian Birkinshaw and Nick Fry (SMR): focus on the drivers

of new development in large, established MNEs.
Entrepreneurial managers in MNEs assume extended roles,
inconsistent with their units formal charter.
Subsidiary initiatives: the proactive and deliberate pursuit
of a new business opportunity by a subsidiary company,
undertaken with a view to expand the subsidiarys scope of
responsibility, in a manner consistent with the MNCs strategic
goals.
132

perspective (3/5)
l
Distinction between internal and external subsidiary

initiatives.
Internal initiatives: attempts by subsidiary managers to
become the chosen location for new corporate R&D
investments.
External initiatives: foreign subsidiary managers
autonomously identify an opportunity in their business
environment and act on it.
After some initial positive results, subsidiary managers may go
to corporate headquarters with a strong case for funding and
for the de facto upgrading of their original corporate
charter.
133

perspective (4/5)
l
Internal and external initiatives are attempts to earn homebase augmenting innovation charters.
Senior management at corporate headquarters may provide
seed funds; invite initiatives through formal calls for
proposals; allow initiatives to flourish in sheltered
circumstances; stimulate internal, social networking.
134

perspective (5/5)
l
l
Key problem: corporate immune system.

Supposed to protect the MNEs dominant logic but becomes
an instrument of powerful stakeholders.
Great challenge for MNEs to create an environment
empowering subsidiaries while maintaining an appropriate
level of initiative scrutiny.
135
Context Second
l
Andrew Inkpen (CMR): demonstrates that distant

knowledge can sometimes be accessed in the home-base
itself.
General Motors (GM), learned about the Toyota Production
System (TPS), especially its lean manufacturing principles
through NUMMI.
GM did not set up a home-base augmenting or exploiting
R&D site in Japan.
136
Context Second
l
GM needed to overcome several bounded rationality

challenges: the routines that drove the TPS system had a
large, tacit component leading to causal ambiguity and
substantial resistance inside GM.
137
Context Second
l
-
-
-
-
-
-
Learning system adopted by GM included:

Study teams at NUMMI learning a specific task and paying
attention to implementation and follow-up;
Experimental learning at NUMMI itself;
Documentation (codification) of TPS knowledge;
Preparation of staff at NUMMI to re-enter GM;
Extensive tours of the NUMMI plant for GM employees;
Formal training programs and promoting NUMMI-alumni to
senior positions at GM.
138
Figure 6.1 Home-base exploiting and augmenting foreign R&D units
Old model
1
International
border
New model
2
Home-base exploiting
foreign R&D units
1. NLB FSAs related to R&D,

transferred from home to host
countries.
2. Internal links between host country
R&D and local manufacturing.
3. External links between host
country R&D and local output market.
4. Reverse transfer of new, NLB
FSAs related to R&D, from host
country operation to home.
1
International
border
LB FSAs in R&D
4
Home-base
augmenting foreign
R&D units
1
International
border
139
Management Insights (1)

l
l
l
Traditional approach of R&D activities centralized in the

home-base reflects pattern I.
Home-base augmenting: analogous to pattern VI
R&D sites classified as home-base exploiting are more
representative of pattern III.
Various host labs working directly together reflects pattern
VIII and pattern IX.
140
Figure 6.2 Patterns of FSA development in home-base

exploiting and augmenting research centers in MNEs
Generic FSA-type
Geographic
source
Home country
operation
Non-transferable
I
III
VI
+
Host country
operation
+
IX
Network
VIII
Key:

141

Two main limitations:
1. Senior managers in the central lab face the challenge of
determining whether subsidiary initiatives in the R&D
sphere are compatible with overall corporate strategy.
2. Omits any discussion of the role of joint ventures and
strategic alliances:
l Especially for home-base augmenting R&D labs, MNE may be
unable to access autonomously host country location
advantages.
l Acquisitions could also eliminate the opportunity for
learning if the complementary specialization and resource
bundles of the firms acquired are destroyed.
.142

1. Analyze your firms portfolio of international R&D
facilities, and categorize these according to their homebase-exploiting versus home-base-augmenting status.
2. Assess whether your knowledge-generating activities are
located in the best possible knowledge clusters with
optimal access to specialized resources.
3. When exploring the drivers of innovation inside the firm,
examine the potential of subsidiary initiatives.
4. Reflect on the potential to partner in alliances, so as to
absorb new knowledge in your industry.
5. Align R&D initiatives in host country labs with overall
corporate goals and consider alternative paths to access
new knowledge (e.g., acquisitions).
143
Chapter Seven: International

Sourcing and Production
Kasra Ferdows,
Making the most of foreign factories,

1. To describe the changes in the business environment
leading to new roles for international factories.
2. To explain the two key parameters underlying the roles of
foreign manufacturing plants and to highlight the six generic
factory roles.
3. To explain the contribution of tools such as flexible
manufacturing systems, just-in-time and total quality
management when locating production plants.
4. To develop an understanding of the difficulties associated
with transferring manufacturing knowledge in hightechnology firms.
5. To identify the limitations of a strategy aimed at upgrading
foreign manufacturing plants.
145
Significance (1)
l
Focus on key issues of location advantages, transferability of

home country FSAs & build-up of host country LB FSAs.
Most successful manufacturing MNEs view their foreign
factories as sources of FSAs beyond the ability to save
costs .
How can a factory located outside of a companys home
country be used as a competitive weapon not only in the
market that it directly serves but also in every market served
by the company?
Foreign factory senior managers attitude is critical.
146
Significance (2)
Changes in the international business environment driving
assignment of new foreign factory roles:
1. International trade tariffs declined substantially in the
second half of the 20th century, so foreign factories can be
more than branch plants.
2. Modern manufacturing increasingly technologically
sophisticated, so that location in sophisticated knowledge
clusters makes sense.
3. Shortened product life-cycles, requiring close linkages
between knowledge development and production.
147
Significance (3)
Possible roles of foreign manufacturing facilities result from:
l Host country location advantages the MNE wants to
access.
l Level of distinct FSAs held by the plant.
148
Figure 7.1 Six roles of foreign manufacturing plants
Level of distinct FSAs

held by the plant
Strategic
purpose of
the plant
Weak
Strong
Access to
knowledge and
skills
Outpost
Leader
Proximity to
market
Access to low
cost production
Server
Contributor
Offshore
Source
149
Significance (4)
Result: Six types of factories
1. Offshore factory: accesses low-cost input production factors;
output exported; no new FSA development; minimum
autonomy.
2. Server factory: supplies predefined, proximate national or
regional output market; overcomes trade barriers, logistics
costs and foreign exchange exposure; some FSA
development; narrow charter with relatively little autonomy or
specialized capabilities.
150
Significance (5)
3. Outpost factory: gathers valuable information from
advanced, host country clusters, mainly on input side;
manufacturing combined with offshore/server factory role.
4. Source factory: accesses low-cost input production factors;
receives resources; engages in resource recombination;
develops FSAs to build best practice plant in MNEs
network; more autonomy; in locations with good infrastructure
and skilled workforce; may be a strategic leader at input side;
narrow charter.
151
Significance (6)
5. Contributor factory: oriented towards host country/region
output market; stronger capabilities; at input market side,
responsible for resource recombination of process
improvements, new product development, customizations,
etc.
6. Lead factory: strong resource recombination and new FSA
development; accesses local clusters valuable inputs and
plays key role in localized manufacturing innovation;
connected with all key-players in input markets (such as
research labs) and end-users at the output side.
152
Significance (7)
l
l
Upgrading process for foreign plants is critical.

End result: robust network of factories with FSAdeveloping roles, able to adapt swiftly to changes in the
marketplace.
In sharp contrast with the popular view that many MNEs
operate a footloose set of plants.
153
Significance (8)
Common obstacles to upgrading of foreign factories:
l Fear of relying on foreign operations for critical skills.
l Treating overseas factories like cash cows and
neglecting long-term investment.
l Creating instability by shifting production in reaction to
fluctuating exchange rates and costs.
l Responding to government relocation incentives to
move factories to new locations that possess minimal
potential for upgrading.
154

perspective (1/2)
MacCormack, Newman & Rosenfield (SMR) The New
Dynamics of Global Manufacturing Site Location
l Senior managers under bounded rationality constraints,
often favour easily quantifiable variables to assess
locations, neglecting critical, longer run elements such as
local workforce knowledge and skills.
l Regionalization trend: MNEs seek manufacturing presence
in each region to mitigate political and economic risks
typically faced by international exporters.
155

perspective (2/2)
l
Emerging manufacturing technologies (FMS, JIT, TQM) place

heavy burden on host country workforce, which is viewed
as an important location advantage.
MNEs recombination capabilities are crucial to access,
exploit and augment skilled human resources in sites selected
for manufacturing operations.
156
Context Second
J.Galbraith (CMR) Transferring core manufacturing
technologies in high-technology firms.
l Observed firms locked into a situation of profitless
prosperity (e.g., scale advantages linked to price wars).
l Solution: move towards system of flexible, smaller
manufacturing plants that can easily adapt to changes, at
demand and supply sides.
157
Context Second
l
Problem: conventional manufacturing technology transfers

entail substantial resource costs (pre-transfer planning/
engineering, post-transfer management/control), as well as
productivity and know-how losses (start-up phase).
Initial productivity losses averaged 34% and several months to
attain pre-transfer levels.
Bounded rationality problem: more pre-transfer training did not
reduce productivity losses.
Bounded reliability problem: donor facility personnel refused to
provide long-term support to the recipient facility.
158

l
Upgrading offshore, server and outpost facilities reflects a

shift from FSAs development at home towards FSA creation
in a host country and the internal MNE network.
FSAs held by weaker affiliates i.e., offshore, server and
outpost plants, include non-LB FSAs transferred from the
home country, with little distinct knowledge added, consistent
with pattern I (international projector).
159

l
Plants engaged in upgrading process:

l Pattern III: FSAs developed in the home country are
diffused to host country, but accompanied by regional
enhancements for local market (contributor factories
assume responsibility for product customizations).
l Patterns V and VI : non-location bound FSAs are
generated in host countries, either autonomously or guided
by head office: occurs in lead factories and source
factories. Lead plants develop into centres of excellence
for specific product areas.
160
Figure 7.1 Six roles of foreign manufacturing plants
Level of distinct FSAs

held by the plant
Strategic
purpose of
the plant
Weak
Strong
Access to
knowledge and
skills
Outpost
Leader
Proximity to
market
Access to low
cost production
Server
Contributor
Offshore
Source
161
Figure 7.2 Ferdows analysis of FSA development in MNEs

Generic FSA-type
Geographic
source
Home country
operation
Non-transferable
I
III
VI
+
Host country
operation
Network
Key:

162
Figure 7.3 Key differences among the six plant types
Outpost factory
Server factory
Offshore factory
The bottom, host country triangle

has a larger middle area than the top
one, because of greater LB-FSA
development in these types of
factories. The thin, curved arrow out
of the bottom host country triangle,
pointing to the left, means the NLBFSAs developed in the host country
can be transferred back to the home
country or to other affiliates in the
MNE network.
Lead factory (knowledge

FSAs)
Contributor factory
(market access FSAs)
Source factory (low cost
production FSAs)
Substantial NLB-FSA
development (lead factory only)
163

Limitations:
1. Nave to assume all plants are candidates for upgrading
to specialized centres of excellence with a distinct
knowledge base inside the MNE.
Economies of scale and scope from an approach with little
plant upgrading must be weighed against benefits of
plants increasingly embedded in host locations, and
deviating substantially from adopting the MNEs key
routines.
164

2.
3.
Ferdows does not discuss the changing nature of

production: outsourcing and increased use of long-term,
relational contracting with external suppliers.
Underestimates value of factories engaged in low-cost,
highly efficient production in host countries, especially
emerging markets, simply adopting and exploiting both
stand-alone technological knowledge, and key routines from
parent.
165

1. View each foreign manufacturing plant as performing
primarily one of six generic roles in the firms portfolio.
2. Consider the potential of upgrading existing, market- and
resource-seeking roles of individual factories.
3. Re-evaluate your portfolio of international operations by
recognizing changes in initial drivers for expansion.
4. Assist source, contributor and lead factories to transform
themselves into centres of excellence.
5. Take into account the quality of human resources when
contemplating low-cost locations: successfully exploiting
advanced production techniques requires access to a pool of
sophisticated human resources.
166
Chapter Eight:
International Finance
DR Lessard and JB Lightstone, Volatile
exchange rates can put operations at
risk
Harvard Business Review 64 (1986),
107-114

1. To define economic exposure and its strategic significance
for the MNE.
2. To describe the various approaches to manage and
minimize economic exposure.
3. To explain the short- and long-term effects of a global cash
management system.
4. To justify why MNEs try to overcome market
imperfections by using financial management tools.
5. To explain the linkages between the MNEs administrative
heritage and its organization of the risk exposure
management function.
168
Significance (1)
l
l
l
Fluctuations in foreign exchange rates create the risk of

net present value reduction of the firms future income
streams.
Potential value reduction is called economic exposure.
Refers to the possible negative effects of largely unexpected
changes in exchange rates on a firms competitiveness
relative to rivals.
169
Significance (2)
l
Important to distinguish between real versus nominal

exchange rates.
Real exchange rate fluctuations create operating exposure
risk for companies.
Operating exposure depends not only 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.
170
Significance (3)
l
Economic exposure adds uncertainty to the value of a

firms location advantages.
Location advantages should be considered, not solely in a
positive sense, and on a country-by-country basis, but also as
a portfolio of potential risks for future cash flows.
MNEs can develop FSAs allowing risk mitigation through an
input-side absorption capability and an output-side
exchange-rate-pass-through capability.
171
Figure 8.1 A classification of operating exposure at the subsidiary level
Strong
Exposure
absorption
capability on
the input
market side
Weak
Weak
Strong
Exchange rate
pass-through on
the output
market side
172
Implications for MNE strategy (1)

Companies typically manage operating exposure through one of
three approaches:
l First approach: each business unit is assessed individually,
and each unit therefore configures its own operations to
reduce its specific operating exposure.
l Second approach: a company-wide perspective, whereby a
portfolio of businesses and operational structures is
established with offsetting exposures.
l Third approach: flexibility in operational planning
(switching production between factories).
173
Implications for MNE strategy (2)

l
Managers who cannot set company policy on operating

exposure should not be held responsible either for the
effects of volatile exchange rates.
The operating exposure effects on performance of
fluctuations in real exchange rates should be eliminated from
performance assessments.
174

perspective (1/3)
l
Christopher Holland, Geoff Lockett, Jean-Michel Richard

and Ian Blackman (SMR) : studied the evolution of a global
cash management system.
Motorolas cash management system evolved from an
internal cost reduction tool to a strategic, supply chain
management instrument.
175

perspective (2/3)
l
1976: internal currency netting system under central

control.
1980: system extension including suppliers, i.e. external
netting.
1992: additional services provided to suppliers, such as
electronic money transfers and value date notification.
Creation of new FSA for Motorola aided by Citibank.
176

perspective (3/3)
l
Reduction in bounded reliability problems caused by banks

in terms of their limited efforts to provide favorable foreign
currency exchange rates to corporate clients and their
tendency to keep money in their internal system as long as
possible, thereby delaying payments.
Bounded rationality constraints: resistance to the cash
netting caused by imperfect information.
Bounded reliability outcome: netting improves transparency
of cash flows and exposes inefficiencies.
177
Context Second
complementary perspective
l
l
l
Alan Rugman (CMR): re-interprets various MNE financial

management instruments as efficient responses to (natural
and government-imposed) imperfections in external markets.
Internal MNE markets allow overcoming such imperfections.
Economic exposure should not drive strategic decisions
such as plant location.
178

Strategic alternatives:
- To develop an FSA, in the sense of a central routine that
allows integrating information on economic exposure in
investment evaluation consistent with Pattern I.
- To combine this internationally transferable knowledge with
local capabilities in the particular affiliates, consistent with
Pattern III.
- In the absence of a central economic exposure policy, Pattern
IV.
179
Figure 8.2 Patterns of FSA development from managing operating exposure in MNEs
Generic FSA-type
Geographic
source
Home country
operation
Non-transferable
I
III
IV
Host country
operation
Network
Key:

180

Two limitations of Lessard and Lightstones HBR article:
1. Many large MNE subsidiaries do have autonomy in supply
chain management processes and targeting of markets.
l Why should managers of such subsidiaries be exempted
from the risks from economic exposure?
l Key challenge is to make subsidiary managers responsible
for the economic exposure they have created themselves,
even if they do not set the MNEs exchange rate policies.
181

2. Lessard and Lightstone neglect that the way economic
exposure will be addressed and how it will be linked with
strategy, will critically depend on the MNEs administrative
heritage.
182
Figure 8.3 Centralized exporter: Operating exposure from changes in

the real exchange rate between the currencies of countries A and B
International
border
The thin, curved arrow out of the home country triangle, pointing to the host countrys LAs, means that the firms NLB FSAs allow for a
strong exchange rate pass through capability in the output market: unfavourable changes in exchange rates, leading to price increases
in the host countrys currency, are simply passed on to host country customers without loss in exported sales volume. The areas A and
B reflect macro-level location characteristics affecting the real exchange rate between the currencies of countries A and B.
183
Figure 8.4 Multi-centered MNE: Overall exposure

from the individual exposures of all foreign affiliates
International
border
Each subsidiary commands its own

exchange rate pass-through capability
(weak or strong) when serving its host
country market, as shown by the three
thin, double-headed arrows. The dotted
arrow for country D suggests a weak
exchange rate pass-through capability
in that country. A and B, A and C and A
and D reflect macro-level location
characteristics affecting the real
exchange rates between the currencies
of countries A and B, A and C, and A
and D, respectively.
184
Figure 8.5 International projector: Centralized exposure management
International
border
The firm operates a centralized exposure management system, meant to reduce overall operating exposure risks faced by the firm, but the unique currency
exposure position of each subsidiary co-determines the functioning of this central system (shown by the thin, curved double-headed arrow connecting home
and host country). The exchange rate pass through capability of each subsidiary depends on the specific inputs it is mandated to access in the host country
and/or on the specific outputs it must sell in the host country (shown by the second double-headed arrow). A and B reflect macro-level location characteristics
affecting the real exchange rate between the currencies of countries A and B.
185
Figure 8.6 International coordinator: Network optimization
International
border
The firms centralized exposure

management system acts as an FSA
to optimize results for the network as a
whole (shown by the circle). Impacts of
this central system on individual
subsidiaries are considered
secondary. A, B, C and D reflect
macro-level characteristics affecting
real exchange rates, and can influence
the complex network linkages that
exist among subsidiaries in countries
A,B, C and D.
186

1. Analyze how you can reduce economic exposure and
impact on the NPV of future income streams.
2. Assess your operating exposure at the level of each
subsidiary, in terms of capacity for adjustment at the input
as well as the output market side.
3. Consider the implementation of a global cash management
system and possible extension and its implications for your
corporate strategy.
4. Discuss the degree of responsibility for economic
exposure by the head office versus the subsidiaries.
5. Examine the relationship between corporate strategy and
international financial management tools.
187
Chapter Nine:
International Marketing
T Levitt
The globalization of markets
Harvard Business Review 61 (1983), 93

1. To define the term global standardization and to
understand the intellectual arguments in favour of
global standardization.
2. To describe the revenue-enhancing and costreducing effects of using the Internet in international
operations.
3. To explain the new types of intermediaries and to
highlight the limitations and restrictions of the Internet
and online sales.
4. To examine the potential and the constraints of global
account management.
5. To identify the managerial challenges associated with
simplistic views on the globalization of markets.
189
Significance (1)
l
Levitt sees the multi-centered MNE being gradually

replaced by centralized exporters and international
projectors.
Advances in technology, communications and travel
confer additional value to non-location-bound FSAs,
and strengthen the MNEs ability to deploy and exploit
such FSAs.
190
Significance (2)
l
Majority of the worlds consumers want high quality,

reliable products at low prices.
They are often willing to accept globally standardized
products.
Companies that grasp this new global reality and can
inject these attributes in simplified products will gain
competitive battles.
191
Significance (3)
l
Two foundations of Levitts argument:

- First: cultures and national societal tastes are moving
toward homogenization.
Converging global preferences overpower differences
rooted in national cultures and historic customs.
Examples: ethnic foods (pizza, pita bread, Chinese
food), music (jazz, country and western), and product
brands (Coke and Pepsi soft drinks, McDonalds fast
food, Sony TVs, Levi jeans).
192
Significance (4)
- Second: converging tastes allow globally standardized
products.
High quality and low cost are complementary goals
achievable through innovation and efficiency.
Even small niches allow for a global approach
satisfying the three criteria (quality, reliability and low
price).
193
Significance (5)
l
Some customization may still be required subject to the

condition that all efforts to achieve acceptance of
standardized products and to change local preferences
have been exhausted.
Administrative heritage and corporate culture do play
a large role in determining the success or failure of a
firms managerial efforts.
194

perspective (1/5)
John Quelch and Lisa Kelin (SMR): potential of the
Internet to change international marketing
l Internet can have revenue enhancing and cost reducing
effects.
l Revenue enhancing side: network effects, including
network externalities.
l Example: Sun Microsystems, Federal Express.
195

perspective (2/5)
l
Internet is a tool to reduce bounded rationality:

inexpensive communication for interactions with potential
customers (informing and persuading).
Growth of new types of intermediaries, acting as
international projectors. For example, standardized
logistics services to support Internet-based sales of
physical products and intermediaries to reduce the
information overload facing internet users.
196

perspective (3/5)
l
But: Limits to standardization:

Brand names will become increasingly vulnerable to
isolated problems with quality, price and availability
Government imposed restrictions may limit
international, Internet-based sales.
197

perspective (4/5)
MNE must have:
1. twenty-four hour order-taking and customer service
response capability.
2. regulatory and customs-handling expertise to ship
internationally.
3. in-depth understanding of foreign marketing
environments.
l
198

perspective (5/5)
l
Difficulty of after-sales service provision: requires a

physical infrastructure and localized human
resources.
Internal challenge inside the MNE: Internet-based sales
should not be at the expense of conventional foreign
affiliates sales.
199
Context Second
David Arnold, Julian Birkinshaw and Omar Toulan
(CMR): the potential and limits of global account
management.
l Global account management: dedicating specialized
resources, typically non-location bound routines, to
serve internationally operating customers in an
integrated fashion.
l Implies standardized supply contracts.
l Host country subsidiaries loose their ability to alter
the marketing mix when serving local operations of
international customers.
200
Context Second
Four pitfalls to global account management:
1. If customer is further ahead with international
coordination, main effect may be price squeezes,
with little benefits to the supplier. Customers
automatically demand the lowest price and volume
discounts.
If the supplier also engages in international coordination
the focus of negotiations on global account agreements
can be redirected from cost considerations to
strategic issues such as additional value added
services, but only if the vendor is one of the customers
main suppliers and the customer is a lead user.
l
201
Context Second
2. Global accounts should be assigned to experienced
executives with a long-term vision, rather than to mere
sales people interested in maximizing short-term sales.
3. Suppliers local sales will remain active so that it may
become impossible to separate the value added of the
suppliers global account team and its local sales
organizations.
4. Alienation may be felt by local marketing management
teams.
202
Context Second
- Senior MNE management must communicate clearly
with local marketing organizations and support global
account managers.
- Senior MNE management must enlist commitment from
local marketing people to the principles of global account
management through allocating sales commissions to
both global account management teams and local
marketing people (formalized incentive splitting).
203
Figure 9.1 Product standardization as

the driver of global competitiveness
The global market
International
border
Absence of LA and LB FSA segments of

the home country triangle, reflects the
models exclusive emphasis on NLB FSAs
as drivers of MNE competitiveness. The
similar sizes of the host country triangles
and their weak separation, using only
dotted lines, reflect the models emphasis
on treating all host countries in a similar
fashion using standardized products to
serve the global market.
International sales of high

quality, cost efficient, and
reliable products
204

l
Successful global companies sell in all national markets

the same kind of products sold at home or in their largest
export market. This mirrors Pattern I.
Levitt views Pattern IV as a relic of the past.
205
Figure 9.2 Levitts perspective of FSA development in MNEs
Generic FSA-type
Geographic
source
Home country
operation
Non-transferable
IV
Host country
operation
Network
According to Levitt, Pattern I should prevail whereas Pattern

IV is a relic of the past.
Key:

206

Five limitations:
1. Little attention to location advantages.
2. Companies that go too far in standardization risk
curtailing subsidiary initiatives and neglecting the
need for new location-bound FSAs as a precondition
for value creation.
207

3. Senior managers may be overoptimistic about the
international transferability of their FSA bundles.
4. Minimum efficient size may represent only a small
fraction of the world market for a product; differing
scale economies in the different value chain
activities; scale can be a potential liability or core
rigidity.
5. Levitt identifies and contrasts only multinational firms
engaged in excessive national responsiveness with
global ones, striving to maximize scale economies. In
reality there are many shades of grey.
208

1. Study your firms product portfolios potential for global
standardization.
2. Examine the potential of the Internet to increase
revenues and reduce costs in international markets.
3. Carefully monitor your Internet activities to avoid law
suits and reputation losses, and make sure online sales
do not cannibalize foreign affiliate sales.
4. Determine the potential and limitations of global
account management.
5. Reflect on your own context (administrative heritage,
internationalization strategy) to determine the limits of
product standardization as the preferred vehicle for
international expansion.
209
Chapter Ten:
Managing Managers in the
Multinational Enterprise
JS Black and HB Gregersen
The right way to manage expats

1. To identify best practices in managing expatriates
and to outline their roles in FSA development and
transfer processes.
2. To examine the pitfalls of managing expatriates.
3. To explain how the purpose and usage of expatriates
depends on the MNEs administrative heritage.
4. To describe how to craft effective organizational
change through a rigorous eight-step process.
5. To show how successful MNEs can improve their
organization-wide capacity to integrate interdependent
international operations through managing
managers.
211
Significance (1)
l
Managers with a broad mental map covering the

MNEs geographically dispersed operations are critical
to the MNEs long-term profitability and growth.
Such managers physically:
l engage in the international transfer of non-locationbound FSAs from the home nation.
l identify the need for new FSA development in host
countries.
l meld both location-bound and non-location-bound
FSA types.
212
Significance (2)
l
These managers are critical to transfer the MNEs

routines and are the physical carriers of the MNE
recombination capabilities.
Expatriation is the most direct and rigorous route
towards deploying individuals with in-depth knowledge of
the MNEs FSAs.
But: many MNEs incur high costs, few reap returns
because of poor expatriate management practices.
Black and Gregersen describe their findings as
alarming.
213
Significance (3)
Four common problems in how firms manage their
expatriates:
1. Senior managers in the home country underestimate
impact of distance and do not invest in selecting and
training potential candidates.
2. Human resources managers have little international
experience themselves.
214
Significance (4)
3. Senior management views expatriates as well paid and
well looked after.
4. Misconception that expatriates do not need help
readjusting after having returned home.
215
Significance (5)
Firms with superior expatriate management practices in
terms of job satisfaction, performance and retention tend
to adopt three best practices:
1. Clear understanding of the expatriations purpose and
related expectations (e.g., creating knowledge and
developing global leadership skills at Nokia)
216
Significance (6)
2. Selecting appropriate candidates whose technical skills
are matched or exceeded by their cross-cultural
abilities.
3. Substantial attention to re-integrating expatriates in
their home country.
(Honda: example that implements all three practices).
217
Significance (7)
Three approaches to select the most suitable candidates:
1. A senior executive personally observes employees in
various cultural settings.
2. Extensive survey early in the employees career and
discussions between potential candidates and senior
managers to identify interest/gaps and establish
personalized development and training plans.
3. Hiring employees with prior international experience
and sending prospects for expatriation on shorterterm, foreign training assignments.
218

perspective (1/6)
C.K. Prahalad and Yves Doz (SMR): new approach to
strategic control in MNEs.
l They focus on an appropriate organizational context.
l Possibility of an unintended transformation over time
from MNEs functioning as conventional international
projectors towards becoming multi-centered MNEs.
219

perspective (2/6)
l
Problem if increased international competition and costcutting needs impose rationalization of the MNE as an
organization, but with corporate headquarters unable
to impose such rationalization.
A control gap exists, which can be closed through an
adequate organizational context.
220

perspective (3/6)
MNEs can be described in terms of four orientations:
1. Cognitive orientation
2. Strategic orientation
3. Administrative orientation
4. Power orientation
l
221

perspective (4/6)
l
Actual change processes to move unintended multicentered MNEs back to having more centralized control:
each successful change process included the same
sequence of eight steps focused on altering the
organizational context, whereby ultimately the four
orientations were fundamentally changed.
222

perspective (5/6)
Eight steps towards successful change:
1. Appoint a new key executive.
2. Alter cognitive orientations of subsidiary managers.
Executive typically employs relatively soft conflict
resolution mechanisms, coordination committees and
task forces involving senior subsidiary managers.
3. Refocus the firms strategic orientation by making
explicit the consequences of new environmental threats.
4. Introduce adequate data management tools
223

perspective (6/6)
5. Perform multiple, minor reallocations of authority.
6. Through cumulative effects of minor changes, establish
the key executive as a powerful actor in the change
process.
7. Make drastic changes, including changes in the status
and career paths of specific managers, and new
incentive systems.
8. As key executive, fine-tune and overhaul data
management tools.
224
Context Second
Christopher Bartlett and Sumantra Ghoshal (CMR)
describe how firms move from an MNE archetype
towards a more balanced approach: not through big
changes in structure, but through adjustments of the
organizational context.
1. How centralized exporters try to shed their
dysfunctional properties.
Matsushita example: use of expatriates; coordination
mechanisms in the most downstream activities (internal
trade shows); personnel transfers across functions.
225
Context Second
2. How multi-centred MNEs try to shed their
dysfunctional properties.
Philips example: increased focus on innovation in
subsidiaries and more attention to integration, through
expatriates (similar to what is expected in many
countries diplomatic services).
226
Context Second
l
Effective integration of geographically dispersed

operations in large MNEs requires new organizational
capabilities carried by each firms cadre of managers
with international experience and an international
mindset.
Building this capability requires the extensive use of
expatriation, international assignments,
international team formation, etc.
227

l
In each of the MNE archetypes, the purpose and scope

of expatriates is different (see figures).
228

Three limitations of Black and Gregersen HBR piece:
1. Expatriation ends with re-integration of expatriates at
home, but this neglects expatriation as a tool to creating
the key executives who will ultimately effect fundamental
change in the MNE.
2. Poor record of expatriation may be indicative of the
inherent friction in home country-host country
relationships. The prior creation of a receptive
organizational context may be critical to subsequent
successful expatriate management.
229

3. No discussion of external expatriation whereby
managers are seconded abroad to strategic partner firms
or international joint venture projects.
230
Figure 10.1 International projector: Expatriates as

knowledge carriers
International
border
The thin, curved arrow represents the role of

expatriates in facilitating the transfer of home
country NLB FSAs to the host country.
231
Figure 10.2 Multi-centered MNEs: Expatriates as carriers of

core values and trusted communication channels
International
border
Host
Country A
Host
Country B
The thin, curved arrow represents the role of expatriates in
Host
Country C
facilitating the transfer of home country routines to the host

country. The thin, double-headed arrows represent the dual role
of expatriates sent to host countries A, B and C: they both foster
the sharing of core values and knowledge from the home
country and act as trusted communication channels between
corporate headquarters and the foreign affiliates.
232
Figure 10.3 International coordinator: Expatriates as key

resources to link internationally transferable FSAs and
location advantages of host nations
International
border
Host
Country A
Home
Country
Host
Country B
The thin, curved arrow out of the

home country represents the roles of
expatriates in facilitating the transfer
of specific bundles of home country
NLB FSAs to each host country. The
double-headed arrows represent the
expatriates role in facilitating the
alignment between the firms NLB
FSAs and the LAs sought in each
host country. The circle represents
the expatriates in countries A, B and
C being connected to create effective
international value chains.
Host
Country C
233

1. Reflect carefully on the common problems of expatriate
management faced by every MNE.
2. Learn about best practices to manage expatriates,
including experiences from competitors.
3. Given your administrative heritage, explore the possible
purposes and forms of expatriation (e.g., external
expatriation, overseas knowledge transfers, extended/
permanent expatriation).
4. Focus strategic change on fine-tuning the MNEs
organizational context, and follow eight implementation
steps that have proven successful in many firms.
5. Train managers to integrate successfully the activities of
234
geographically dispersed international operations.
Chapter 11
Entry Mode Dynamics 1:
Foreign Distributors
D. Arnold,
'Seven rules of international distribution',
131-137

1. To explain the reasons why MNEs establish long-term
relationships with local distributors, even when they also
command a wholly owned distribution network.
2. To foster an understanding of the role of foreign
distributors in the FSA development process.
3. To provide concrete guidelines to MNEs on how to
manage local distributors in host countries.
4. To describe the challenges facing large MNEs in dealing
with mega-distributors such as Wal-Mart and the
benefits of direct sales.
5. To define the bullwhip effect and to illustrate how
manufacturing companies should manage uncertainty on
236
the input and output sides of the supply chain.
Significance (1)
l
Describes local distributors changing role when MNEs

try to grow foreign markets.
Initial use of local distributors aims to reduce costs and
minimize risks: distributors complementary capabilities
substitute for developing new, LB FSAs to access host
country markets in cases of high uncertainty.
After early market penetration and reaching of a ceiling
the typical MNE response is to blame the local partner:
alleged lack of reliability to make good on performance
commitments and expectations.
237
Significance (2)
l
MNEs reflex is to take control: buying out the

distributor to build a self-owned, dedicated distribution
network, but often resulting in disruptive and costly
transition period.
Effective strategic planning of distributor selection and
relationship governance may avoid/solve many
problems with local distributors.
238
Significance (3)
l
MNEs often seek new markets through a reactive

approach: beachhead strategy.
Vicious cycle of bounded reliability: each side assumes
the arrangement is temporary and invests minimally.
Expectations are not met, and a blame game further
destroys the relationship.
Arnolds research shows:
l Many MNEs do not give proper direction and
resources to distributors, and cede control of
strategic marketing to them.
l MNEs maintain too long the initial entry strategy with
low resource commitments, thus impeding rapid
239
growth.
Significance (4)
l
MNEs should keep independent, local distribution

partners in the long term, even after establishing their
own local network for primary clients.
Characteristics of success cases: distributors
l did not distribute competing product lines from
rivals;
l shared market information with the MNE;
l initiated new projects and collaborated with other
distributors in adjacent markets;
l invested to grow the business in areas such as such
as training, ICT and promotion.
240
Significance (5)
Guidelines for MNEs managing local distributors:
1. Pro-actively select locations and only then suitable
distributors: do not expand as a response to unsolicited
proposals from local distributors. Best distributors are
not necessarily the largest, who may have contracts with
rivals and an interest in dividing the existing market among
them, rather than rapidly building this market for one firm.
2. Focus on distributors market development
capabilities. Critical is the best company fit in terms of
strategy, culture and willingness to invest, not the market
fit with distributors already serving key target customers
with related products.
241
Significance (6)
3. Manage distributors as long-term partners: give
incentives to invest in long-term development. E.g., if the
buy-back price depends on sales volumes, not profit
margins, the distributor may position the product as a
commodity, rather than extract the highest price from
customers and harm the products positioning.
4. Provide resources (managerial, financial and
knowledge-based) to support distributors for marketdevelopment purposes: committing more resources
(skilled support staff, minority equity participations and
knowledge sharing) earlier may foster higher performance.
242
Significance (7)
5. Do not delegate marketing strategy to distributors:
the MNE should provide clear leadership on choice of
products, their positioning, marketing budget size, etc.
Distributors should adapt this strategy to local market
needs.
6. Secure shared access to the distributors critical
market and financial intelligence: their willingness to
share this information, signals their commitment to
becoming a solid, long-term partner.
243
Significance (8)
7. Link national distributors with each other, especially
at the regional level (spanning a number of
countries): regional headquarters to coordinate
distribution efforts, or autonomous distributor councils,
may lead to best practices diffusion inside the
distributors network, and act as an internal monitoring
mechanism, stimulating more consistent strategy
implementation throughout the region.
244

perspective (1/2)
l
l
Primarily relevant to centralized exporter.

MNEs can benefit from strengthening international
linkages with external parties that command
complementary FSAs, especially if these FSAs would
take a long time to develop internally and cannot be
simply purchased in the host country market.
245

perspective (2/2)
Thomas &Timothy (2006) 'The outsourcing compulsion',
MIT SMR:
l Since 70s, firm focus on core competencies and production
TQM: neglects distribution and sales.
l Market power of mega-distributors leads to downward price
pressures, and forces off-shoring to low-cost locations
(China).
l Serves mega-distributors: cost reductions at input side (offshoring) trigger further price squeezes.
l Manufacturers should regain distribution control and
engage in direct marketing (Dell): Consistent with Arnolds
prescription of controlling the strategic marketing of foreign
246
distribution.
Context Second
Lee (2002) 'Aligning supply chain strategies with
product uncertainties', CMR
l Demand uncertainty results from MNEs limited
capability to understand the requirements for LB FSAs in
distribution to develop new markets, as a complement
to its internationally transferable FSA-bundle,
embodied in its exported products.
l Supply side uncertainty results from bounded
rationality challenges in logistics optimization (new
country needs must be linked to existing supply chain).
247
Context Second
To remove demand and supply side uncertainties:
- Share sufficient information on demand.
- Postponement strategy, i.e. maximize flexibility by
leaving customization to the latest point, e.g. Benetton
sweater colours.
- Risk hedging, e.g. regional level inventory pool.
l
248

l
Not developing LB FSAs when penetrating a host

country is an important mistake.
Choice between internalization and alliance formation
with external partners for carrying distribution activities.
Subsidiaries should adopt a standardized approach
for large international accounts, whereas local
distribution partners should be nationally responsive,
providing unique service coverage, adapted to each host
market (Patterns I and IV).
249

l
If MNE relies solely on independent distributors with

weak CHQ strategic control, Patterns V or VIII are
unlikely.
MNE subsidiaries cooperating with external partners
for distribution purposes have FSA development
resembling Pattern III.
If subsidiaries and distributors work as a network to
create new FSA bundles (customized with host market
LB additions), and transform these into NLB FSAs,
Patterns IX and X may occur.
250
Figure 11.1 FSA development in international distribution:

Arnolds perspective
Generic FSA-type
Geographic
source
Home country
operation
Non-transferable
I
III
IV
Host country
distributors
+
IX
Distributors
networks
X
Non-transferable (location-bound) FSAs in the distribution

sphere held by the distributor
Key:
Internationally transferable (Non location-bound) FSAs in

the distribution sphere
Internationally transferable (Non-location bound) FSAs
held by distributors
Explicit headquarters control in the distribution sphere
I
Internalization of international distribution
III
Mix of internalization and external distribution
IV
Independent local distribution
IX
Local customization of distributors network knowledge
Transformation of knowledge from distributors networks
251
Figure 11.2 Optimal governance of international distribution

Need for external sourcing
Low
High
High
3A
3B
4A
4B
Requirements for
technical
customization/
adaptation (location
unrelated)
Low
Low
High
Requirements for location-determined

customization/adaptation
252

Limitations of Arnolds HBR piece:
1. Customer size is critical, real question is level of
customization and product adaptation, that is
location-related.
2. Sole focus on distribution leads to a relative neglect
of the input-market side and the need for an
integrative approach to the various supply chain
components.
253
Figure 11.2 Optimal governance of international distribution

Need for external sourcing
Low
High
High
3A
3B
4A
4B
Requirements for
technical
customization/
adaptation (location
unrelated)
Low
Low
High
Requirements for location-determined

customization/adaptation
254
Figure 11.4 Managing foreign distribution
International
border
E
B
The NLB FSAs in the realm of

distribution transferred to
foreign operations in different
host countries are indicated
by A, B and C. The
complementary resources
provided by distributors in
each of these host countries
to meet local requirements,
are indicated by D, E and F.
255

1. Review your international distribution strategy and
portfolio of relationships with local distributors.
2. Follow the seven guidelines for MNEs when using local
distributors in international expansion.
3. Consider the disadvantages of using distributors and the
benefits of direct sales.
4. Assess in a comparative fashion the uncertainty in your
input and output markets in your supply chain.
5. Evaluate the optimal governance of international
distribution and apply an integrative approach to
coordinate various components of your supply chain.
256
Chapter 12
Entry Mode Dynamics 2:
Strategic Alliance Partners
G Hamel, YL Doz and CK Prahalad
Collaborate with your competitors and
win
133-139

1. To describe the meaning of strategic alliances and
their main benefits.
2. To explain the concept of dependency spiral and the
ways to avoid it when outsourcing.
3. To develop an understanding of the risks of
dependence, exploitation and abuse in strategic
alliances.
4. To support a reflection on the meaning of the learning
race and learning asymmetry concepts in the
alliance context.
5. To illustrate how MNEs select wholly owned affiliates
versus alliances in the emerging economy context.
258
Significance (1)
l
Focus on large MNEs forming alliances with foreign

firms that are also rivals (competitive collaboration).
Rationale: enormous R&D costs and gaining easy
access to the scarce resources required to launch new
products. Problems are amplified within a context of
compressed timeframes.
Question: why do some MNEs gain strongly, whereas
others end up as losers?
259
Significance (2)
l
Benchmark for evaluating alliance success: not how

long the alliance lasts but the change in competitive
strength experienced by each partner.
Overall, Japanese MNEs and more generally Asian
firms often come out ahead in strategic alliances.
260
Significance (3)
l
Four reasons for better performance by Asian MNEs:

- Intrinsically more receptive and willing to put effort
into learning from alliance partners.
- View alliances as an opportunity to develop new
FSAs, not primarily as a tool to reduce investment costs
and risks.
- Define clear learning objectives and focus efforts on
acquiring new knowledge.
- Own contribution to alliances often involves complex,
tacit process knowledge that is not easily imitated or
transferable.
261
Significance (4)
l
Many alliances between Western and Asian MNEs are

outsourcing arrangements (manufacturing and
technology development become the Asian partners
responsibility).
Risk is that the Asian partner enters markets on its
own, outside the alliance agreement because of what it
has learned inside the alliance.
Weaker firms become trapped in a dependency spiral.
262
Significance (5)
l
MNE managers should respect four principles to

avoid increasing dependency on a partner:
- Outsourcing cannot replace building FSAs.
- Negative consequences of outsourcing should be
measured in terms of capability losses.
- Managers should be aware of the cumulative effects
of outsourcing decisions (deepening dependence on
outside actors).
- If FSAs do dissipate, they must be rejuvenated and
strengthened as quickly as possible.
263
Significance (6)
l
It is possible for both MNEs to benefit: the key condition

is each MNEs willingness and ability to learn from its
partner, while avoiding excessive transfer of its own
proprietary knowledge.
Each MNE should also disseminate new knowledge
internally in an effective fashion.
The nature of the FSAs contributed by an MNE affects
how easily these may diffuse to a partner: FSAs
mobility and ease of sharing, without problems of
interpretation or absorption across cultures.
264
Significance (7)
l
How to limit replicability and unintended FSA diffusion:

- Limit the formal scope of the alliance to a well-defined
learning area.
- Locate away from the MNE headquarters.
- Establish incremental, performance-related
checkpoints to assess alliances scope and impacts.
- Empower company gatekeepers to control informal
information transfers to the partner.
265

perspective (1/3)
Erin Anderson and Sandy Jap (SMR) address the dark
side of alliances:
l A harmonious relationship may not be a good
indicator for alliance success.
l The best relationships on the surface, i.e. the most
stable and long-lasting ones may also be the most
vulnerable.
l Especially if one partner engages in continuous
alliance-specific investments, whereas the other does
not, the incentive for the latter to abuse the relationship
becomes stronger.
266

perspective (2/3)
High trust makes a relationship more vulnerable to
bounded reliability, unless safeguards (six types) are
introduced:
- Regular re-evaluation of the alliance relationship.
- Continued focus on profitability, not volume.
- Continued attention to alternatives (back-ups).
- Swapping hostages.
- Setting and reassessing common goals.
- Avoiding vicious cycles of suspicion and the resulting
build-up of bounded reliability.
l
267

perspective (3/3)
l
Study of the dark side is particularly useful in the

international context of expansion to high distance
countries.
Three reasons:
- Goals and time frames differ more than with singlecountry partnerships: greater cultural, economic
institutional and spatial differences.
- Higher distance is a driver of suspicion.
- Higher distance also has important effects on
differences in resource combination.
268
Context Second
Prashant Kale and Jaideep Anand (CMR): Alliances in
emerging economies (India).
l Joint ventures are often set up when they are the foreign
MNEs only penetration option, given a restrictive
regulatory regime.
l Local partner substantive contribution results from FSAs
in government relations and other location-bound
FSAs allowing national responsiveness.
269
Context Second
l
After FDI liberalization in India in 1991, five key

changes occurred in a majority of joint ventures:
- stronger MNE strategy setting.
- increased MNE equity stake.
- greater MNE control over joint venture operations.
- increase in MNE board representation.
- the replacement of the local CEO by an expatriate.
270
Context Second
l
With ongoing liberalization, the incentive for alliances

with a local Indian partner in many cases
disappeared, except in cases of strong resource
complementarity.
In those cases, foreign MNEs usually won the
learning race.
271
Context Second
l
-
-
Reasons for better MNE learning performance:

Stronger MNE intent to learn from the partner.
Better MNE preparedness to identify learning
opportunities based on prior experiences with local
partners elsewhere.
272
Context Second
-
MNE learning routines underlying its learning

capability:
1. explicit assignment of individuals/units to manage the
learning function;
2. rotating managers and employees between the MNE
and the joint venture;
3. systematic interactions between alliance personnel,
and personnel elsewhere in MNE.
273
Context Second
l
The learning asymmetry between the MNE and its local

partner creates an inherent instability in the joint
venture.
MNE is likely to win any learning race against its
partner, thereby eliminating resource complementarity.
Growing incentive to transform the joint venture into a
wholly owned subsidiary.
274
Context Second
l
This dynamic is the opposite of the obsolescing

bargaining, typical in the past for MNE investments in
resource-based industries.
In many contemporary cases MNEs value added may
reside in intangible FSAs, which can easily be
redeployed across borders without loss of productive
value.
275
Figure 12.1 Dissipation of FSA

bundles to alliance partners
Asian MNE
JV
Re-combination
capabilities
Combination
Routines
capabilities
Stand-alone
FSAs
Stand-alone
FSAs
Routines
Re-combination
capabilities
The two thin, curved arrows

pointing to the quadrilateral
representing the joint venture,
indicate that the Western
MNE contributes stand-alone
FSAs and the Asian MNE
contributes routines to the JV.
The thick arrow pointing right
and the dotted arrow pointing
left indicate that more of the
JVs contribution to knowledge
can be captured by the Asian
MNE as compared to the
Western one.
Western MNE
Figure 12.1A Archetype of western

MNE Asian MNE alliance
Asian MNE
Re-combination
capabilities
Combination
Routines
capabilities
Stand-alone
FSAs
Stand-alone
FSAs
Stand-alone
FSAs
Routines
The LB and NLB FSAs of the

Asian MNE have grown due to
the absorption of its partners
stand-alone FSAs, while the
Western MNEs stand-alone
FSAs have shrunk in relative
terms due to the dissipation of
its knowledge base to the
Asian MNE.
Re-combination
capabilities
Western MNE
Figure 12.1B Outcome of archetypal

western MNE Asian MNE alliance
276
Figure 12.2 Alliance in emerging economies
Emerging economy firm
Stand-alone
FSAs
Routines
Re-combination
capabilities
Large MNE
Non-location
bound FSAs
Location-bound FSAs
Location advantages
In a typical alliance in an emerging economy, represented here by a dotted

circle, the foreign MNE transfers NLB FSAs to the alliance, whereas a local
partner in the host country contributes LB FSAs. Together these FSA bundles
deployed through the alliance allow accessing and benefiting from the coveted
LAs in the host country, as indicated by the bold arrow.
277
Figure 12.3 Alliance in emerging economies

Large MNE
Both the foreign MNE and the
emerging economy MNE
contribute NLB FSAs to the
alliance in the emerging economy
(represented by the dotted circle)
as equal partners.
Large MNE
Figure 12.3A Large MNE and emerging

economy MNE as equal partners

The outcome of this emerging
economy alliance is that both the
foreign MNE and the emerging
economy MNE have been able to
strengthen their NLB FSA base
by learning from their partner
through the alliance activity. This
learning has two parts: first, the
absorption of the existing
knowledge of the partner
(ordinarily shaded extension of
each triangle); second, new
knowledge creation arising from
the alliance activity (criss-cross
shaded extension of each
triangle).
Large MNE
Figure 12.3B Outcome of large MNE and

emerging economy MNE partnership
278
Figure 12.4 MNE foreign market penetration via wholly

owned affiliates versus alliances
Targeted FSAs
Entry mode
Location-bound
complements to extant
FSA bundles
Investments to develop
internationally exploitable
FSAs and SSAs
Investments to develop
location-bound FSAs
Wholly-owned
afilliate
Alliance
Non-location bound
complements to extant FSA
bundles
Access to location-bound
FSAs through alliance
Key:
SSAs
ASAs
Access to - or joint creation

of - internationally
exploitable FSAs and ASAs
Subsidiary specific advantages

Alliance specific advantages
279

Limitations of Hamel et al (HBR):
1. With alliance specific advantages (ASAs), partners in
the alliance cannot simply exit and take their learning
with them.
2. A learning race may be dysfunctional: the intent to
limit knowledge sharing may itself lead to a vicious cycle
of increasing bounded reliability.
3. Hamel et al insufficiently reflect on the impact of
culture on alliance dynamics.
280

Impact of culture:
l First simplistic interpretation: MNEs from some
cultures are more inclined to opportunism than those
of other cultures.
l Second simplistic interpretation: some cultures are
not conducive to competent cooperation, and should
abstain from alliances.
l Third, more sophisticated view: some countries may
have a location advantage in managing alliances,
thanks to a multi-decade long tradition of absorbing
and adopting foreign knowledge bundles.
281

l
Role of country-level culture as compared to corporate

cultures of the firms engaged in alliance formation?
A corporate culture suggesting that alliance functioning
is little more than a learning race may jeopardize
success.
Culturally determined, false attributions of cheating
may lead to genuine attempts to cheat, as the result of
a vicious cycle of suspicion build-up.
282

1. Remember the four key principles for successful
international partnerships and prevention of excessive
dependency on an alliance partner.
2. Limit the unintended diffusion of FSAs by assessing
their mobility and embeddedness.
3. Examine whether sufficient safeguards have been
established in your alliance agreements.
4. Evaluate your learning performance in alliances.
5. Consider the impact of your own strategic decisions on
the quality of your relationship with your alliance
partners.
283

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International Business

Strategy: Rethinking the

Cambridge University Press, 2013

Introduction and overview of the books framework

Part one. Core concepts

TABLE OF CONTENTS (2)

TABLE OF CONTENTS (3)

Part three. Dynamics of global strategy

Chapter One: Conceptual

Five learning objectives

To develop an understanding of the seven

Five learning objectives

To define the ten often-observed patterns of FSA

International business strategy means effectively and

The seven concepts of the

Internationally transferable (or non-location bound)

Figure 1.1 Core concepts

The triangular shape in the model represents

Internationally transferable (or

The MNEs unique resource base

Physical resources (natural resources, buildings, plant

The MNEs unique resource base

Building upon its resource base, as well as its access

The distinct ability to combine further the firms

Constitutes the heart of international business strategy.

Some FSAs are not transferable

Some FSAs are not transferable

Even if transferability of the relevant resources were

Entire set of strengths of a location, and accessible by

Motivations for foreign expansion

Natural resource seeking.

Figure 1.2 The essence of international business strategy

The shading of the middle of the

Four MNE archetypes:

Standardized products manufactured at home embody

Figure 1.3 Centralized exporter

The arrow cutting through dotted

Four MNE archetypes:

Knowledge-based FSAs developed in the home country

Figure 1.4 International projector

The dotted area of LB FSAs in

Location advantages Non-transferable (or

Four MNE Archetypes:

International operations are specialized in specific value

Figure 1.5 International coordinator

The different sizes of the shaded

Four MNE archetypes:

The multi-centred MNE consists of a set of

Figure 1.6 Multi-centered MNE

The multi-centered MNE

MNE strategy in practice

Most large, established MNEs with sophisticated

Figure 1.7 Ten patterns of FSA development in MNEs

Non-transferable (location-bound) FSAs

Needed from external actors (technology providers,

Bounded rationality versus

Bounded rationality is about the imperfect

Key questions in international

What is our distinct resource base, including

Key questions in international

Do we have the required resource recombination

Chapter Two: The Critical Role of