BBM 475 NOTES

INTRODUCTION TO INTERNATIONAL BUSINESS

1. Definition of international business
International business involves commercial activities that cross national frontiers. It
concerns the international movement of goods, capital, services, employees and
technology; importing and exporting; cross-border transactions in intellectual
property (patents, trademarks, know-how, copyright materials, etc.) via licensing
and franchising; investments in physical ; financial assets in foreign countries;
contract manufacture or assembly of goods abroad for local sale or for export to
other nations; buying and selling in foreign countries; the establishment of foreign
warehousing and distribution systems; and the import to one foreign country of
goods from a second foreign country for subsequent local sale.
Why firms engage in international business
Businesses undertake international operations in order to expand sales, acquire
resources from foreign countries, or diversify their activities (Anderson 1993).
Specific reasons for doing business abroad include the saturation of domestic
markets: discovery of lucrative opportunities in other countries: the need to obtain
materials, products or technologies not available in the home nation; increases in
the flow of information about conditions in foreign states; desires to expand the
volume of a firm's operations in order to obtain economies of scale: or the need to
find an outlet for surplus stocks of output. Further motives for operating
internationally are as follows:
a) Commercial risk can be spread across several countries.
b)Involvement in international business can facilitate the 'experience curve' effect,
i.e. cost reductions and efficiency increases attained in consequence of a business
acquiring experience of certain types of activity, function or project. These effects
differ from economies of scale in that they result from longer experience of doing
something rather than producing a greater volume of output. Moreover, the firm's
management is exposed to fresh ideas and different approaches to solving problems.
Individual executives develop their general management skills and personal
effectiveness; become innovative and adopt broader horizons. All these factors can
give a firm a competitive edge in its home country.
c) Economies of scope (as opposed to economies of scale) might become available.
Economies of scale are reductions in unit production costs resulting from large-scale
operations. Common examples are discounts obtained on bulk purchases, benefits
from the application of the division of labour, integration of processes, the ability to
attract high calibre labour and the capacity to establish research and development
facilities. Similar benefits might occur from 'economies of scope', i.e. unit cost
reductions resulting , from a firm undertaking a wide range of activities, and hence
being able to provide common services and inputs useful for each activity. Note how
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economies of scale might not be available if the firm has to modify its products,
promotional strategies and business methods substantially for each country in
which it operates, and that the extra costs of foreign marketing, establishment of
subsidiaries in other countries, market research, etc., could erode the benefits
obtained from a higher volume of output.
d) The costs of new product development could require so much expenditure that
the firm is compelled to adopt an international perspective.
e) There might be intense competition in the home market but little in certain
foreign countries.
f) A company's overall strategies and plans can be anchored against a wider range
of (international) opportunities. Sudden collapses in market demand in some
countries may be offset by expansions elsewhere.
g)Cross-border trade is today much easier to organize than in the past. International
telephone and fax facilities are much better than previously and facilities for
international business travel are more extensive. Hence it is simpler to visit
potential foreign customers, partners and/or suppliers, to select the best locations
for operations, and thereafter to control international activities.

Why enter overseas markets?

The reasons for entering overseas markets can be categorized into push and
pull factors:
Push factors
Saturation in domestic markets
Economic difficulty in domestic markets
Near the end of the product life cycle at home
Risk diversification
Excess capacity
Pull factors
The attraction of overseas markets

Increase sales
Enjoy greater economies of scale
Extend the product life cycle
Exploit a competitive advantage
Personal ambition
Factors in the choice of which overseas market(s) to enter:
Size of the market (population, income)
Economic factors (state of the economy)
Cultural linguistic factors (e.g. preference for countries with similar cultural
background)
Political stability (there is usually a preference for stable areas)
Technological factors (these affect demand and the ease of trading)

Constraints and difficulties in entering overseas markets;

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Resources
Time
Market uncertainty
Marketing costs
Cultural differences
Linguistic differences
Trade barriers
Regulations and administrative procedures
Political uncertainties
Exchange rates (transactions costs & risks)
Problems of financing
Working capital problems
Cost of insurance
Distribution networks

All the basic tools and concepts of domestic business management are relevant to
international business. However, special problems arise in international business not
normally experienced when trading or manufacturing at home. In particular:
Deals might have to be transacted in foreign languages and under foreign
laws, customs and regulations.
Information on foreign countries needed by a particular firm may be difficult
(perhaps impossible) to obtain.
Foreign currency transactions will be necessary. Exchange rate variations can
be very wide and create many problems for international business.
Numerous cultural differences may have to be taken into account when
trading in other nations.
Control and communication systems are normally more complex in foreign
than for domestic operations.
Risk levels might be higher in foreign markets. The risks of international
business include political risks (of foreign governments expropriating the
firm's local assets, of war or revolution interfering with trade, or of the
imposition of restrictions on importers' abilities to pay for imports);
commercial risks (market failure, products or advertisements not appealing to
foreign customers, etc.); and financial risks - of adverse movements in
exchange rates, tax changes, high rates of inflation reducing the real value of
a company's foreign working capital, and so on.
International managers require a broader range of management skills than do
managers who are concerned only with domestic problems.
Large amounts of important work might have to be left to intermediaries,
consultants and advisers.
It is more difficult to observe and monitor trends and activities (including
competitors' activities) in foreign countries.
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Why study international business?

Nowadays the great majority of large enterprises operate internationally (as do an
increasing number of small to medium sized firms), so that an awareness of the
major issues in international business is a valuable asset for any manager in a
company that deals with suppliers, customers, contractors, licensees, etc., in other
countries. The study of international business helps the individual supplement his or
her knowledge of general business functions (accounting and finance, personnel,
marketing, etc.) through examining issues, practices, problems and solutions
relating to these functions in foreign states. Also, it develops a person's sensitivity
to foreign cultures, values and social norms, thus enabling the individual to adopt
broader perspectives and hence improve his or her overall managerial efficiency.
Note how firms involved in international business necessarily operate in
multifaceted, multicultural environments.
Entry strategies to foreign market:
Exporting, Licensing, Joint Venture, Direct Investment and Exporting
Exporting is the marketing and direct sale of domestically-produced goods in
another country. Exporting is a traditional and well-established method of reaching
foreign markets. Since exporting does not require that the goods be produced in the
target country, no investment in foreign production facilities is required. Most of the
costs associated with exporting take the form of marketing expenses.
Exporting commonly requires coordination among four players:
Exporter, Importer, Transport provider and Government
Licensing
Licensing essentially permits a company in the target country to use the property of
the licensor. Such property usually is intangible, such as trademarks, patents, and
production techniques. The licensee pays a fee in exchange for the rights to use the
intangible property and possibly for technical assistance.
Because little investment on the part of the licensor is required, licensing has the
potential to provide a very large ROI. However, because the licensee produces and
markets the product, potential returns from manufacturing and marketing activities
may be lost.
Franchising
This is a special form of licensing which allows the franchisee to sell a highly
publicized product or service using the parents brand name or trademark, carefully
developed procedures and marketing strategies. In exchange the franchisee pays a
fee to the parent company typically based on the volume of sales of franchisor in its
defined market area e.g. Coca Cola
Foreign Branching

This is an extension of the company in its foreign market- a separately located

strategic business unit directly responsible for fulfilling the operational duties
assigned to it by corporate management including sales, customers service and
physical distribution. Host countries may require that branch companies to be
domesticated i.e. have managers in middle and higher level positions to come from
the host country.
Joint Venture
There are five common objectives in a joint venture: market entry, risk/reward
sharing, technology sharing and joint product development, and conforming to
government regulations. Other benefits include political connections and
distribution channel access that may depend on relationships.
Such alliances often are favorable when:
The partners' strategic goals converge while their competitive goals diverge;

the partners' size, market power, and resources are small compared to the
industry leaders; and
Partners' are able to learn from one another while limiting access to their own
proprietary skills.
The key issues to consider in a joint venture are ownership, control, length of
agreement, pricing, technology transfer, local firm capabilities and resources, and
government intentions.
International Business Terms
Organization structures have given rise to the following companies:
International companies are importers and exporters and have no investment
outside their country.
Multinational companies have investment in other countries, but do not have
coordinated product offerings in each country. They more focused on adapting their
products and services to each individual local market.
Global companies have invested and are present in many countries. They market
their products through the use of the same coordinated image/ brand in all markets.
Generally one corporate office that is responsible for global strategy. Emphasis is on
volume, cost management and efficiency.
Transnational companies are much more complex organizations they have
invested in foreign operations have a central corporate facility but give decision
making, R&D and marketing powers to each individual foreign market.
Multidomestic industries: firms compete in each national market independently
of other national markets. Involves products tailored to individual countries
innovation comes from local R&D. There is decentralization of decision making
within the organization
These corporations have been oriented into four types:
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Ethnocentric: governance is top down, strategy is global integration, products

development is determined primarily by the needs of home country customers and
people of home country are developed for key positions everywhere in the world.
Polycentric: governance is bottom up where each subsidiary decides on local
objectives, strategy is national responsiveness, local products are developed based
on local needs and people of local nationality are developed for key positions in
their own country.
Regiocentric: governance is mutually negotiated between regions and its
subsidiaries, strategy is regional integration and national responsiveness, products
are standardized within region but not across regions, regional people are
developed for key positions anywhere in the region,
Geocentric: governance is mutually negotiated at all levels of the corporation,
strategy is global integration and national responsiveness, global products with local
variation, best people everywhere in the world are developed for key positions
everywhere in the world.

EVOLUTION OF INTERNATIONAL BUSINESS

The Exploration Era to 1500
The history of business dates back to prehistoric times. Villages formed to allow
early divisions of labor to provide goods and services for communities. As expertise
accumulated in the production of goods, infrastructures (mainly roads) were built to
link communities, and local markets evolved into regional markets, attracting
increased varieties of merchants and manufacturers. As regional markets took
shape, road and transportation systems developed to link major commercial
centers, and national markets for products emerged. The ancient civilizations of
Latin America (the Incas, Mayas, and Aztecs), Egypt (the Pharaohs, pyramids),
Western Europe (the Greeks and the Romans), and Asia (India and China) illustrate
humankinds early efforts to innovate and use technology to upgrade standards of
living. But in those days, advances in technologies and living standards were slow to
move beyond national frontiers. As commerce extended throughout countries,
merchants began to look to foreign markets for trading opportunities, and so the
seeds of international business were sewn. In its early years, international
commerce was limited to the reliability of seafaring ships, and land routes were
popular. From the 6th century BC, the Silk Road, running from the Middle East to
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China, was a major commercial conduit carrying artifacts, metals, and semiprecious
stones across Asia, as well as new ideas such as Buddhism and Islam. Later, the
Romans demonstrated the importance of supply routes as they managed an empire
stretching from Britain across Europe to reach the Middle East and North Africa.
Trade routes were established and roads built to equip its armies; a common
currency (the Dinarius) was used to lubricate commercial dealings.
Major steps forward occurred in the 12th and 13th centuries as compasses for
navigational use, advances in sails and rigging, and hinged rudders revolutionized
ocean travel. Italian explorer Marco Polo reached China by the late 13th century.
Vasco de Gama, a Portuguese navigator, circumnavigated the South African Cape of
Good Hope to reach India in 1498, and Columbus officially was the first European to
discover the Americas in 1492. To replenish ships and to provide bases for further
exploration, trading outposts were built. As the commercial potential of the
Americas and Asia unfolded, regular trading routes were established. To finance
transcontinental trade, new corporate forms emerged in Italy and later in Europe
such as joint stock companies. Intercontinental trade prospered until nationalistic
concerns took over, and European countries saw merit in taking political control of
the new foreign markets.
Modern-day effects. While the rudiments of an international trading system were
taking shape, other, long-lasting cultural transplants were occurring as religious
spheres of influence were established. The Romans adopted Christianity in the 4th
century and spread it throughout their European empire. Islam diffused throughout
the Middle East and North Africa and along the Silk Road to Asia. Buddhism moved
eastward from India to East Asia, and Confucianism and Taoism moved westward
from China to East Asia, also through trade and via the Silk Road. These early
movements established the major spheres of religious influence that we have today.

15001900: The Colonial Era

The Colonial Era saw military conquests, colonization, and the advent of regular
international trade taking technologies to other nations, as the major European
powers competed to establish empires in the Americas, Africa, and Asia. Foreign
influences were magnified through diffusion catalysts: ideas, philosophies, and
technical innovations that increased the speed, efficiency, and effectiveness of the
movements of ideas and goods between and within nations. These diffusion
catalysts included the following:
The development of mega languages. For ideas and technologies to travel,
there had to be common means of communication between markets. In early times,
these were Greek, Latin, and Mandarin Chinese. In later years, use of English and
European languages facilitated the transfer of ideas and technologies among
countries.
Advances in arms and military capabilities. The advent of cannons and
firearms gave colonizing powers significant advantages over local populations,
enabling them to subdue and maintain control of colonies with limited manpower
and resources.
Writing and printing technologies extended the spread of knowledge beyond
personal experiences and oral transmissions. Potted knowledge, in the form of
books, brought about a broadening of individual knowledge bases. Formal education
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systems, emphasizing literacy and technical skills, led to a wider dissemination of

skills via schools, guilds, and universities. Knowledge became increasingly mobile
and transferable.
Transportation innovations. The steam engine revolutionized industry and travel
with its applications to factories (1781), ships (1783), rail (18031829), and buses
(1824). The steam engine brought international markets closer together and
provided access to remote corners of large national markets. As the colonizing
powers took these innovations to foreign markets, the transportation of goods over
wider areas created regional and national markets for merchandise.
Advances in communications complemented transportation innovations.
The 19th century saw the advent of the electronic telegraph and the telephone.
Both facilitated information flows between and within national markets, and aided
market supply and demand mechanisms. These factors, along with national print
media, gave the world a connectivity it had never before experienced.

1900Today: The Era of the International Corporation

By the end of the 19th century, much of the world had been explored and colonized.
While foreign influences had introduced new technologies and lifestyles into the
developing world, there had been some notable early backlashes, especially in the
Americas with U.S. independence in 1776 and Latin Americas between 1810 and
1824. As the 20th century unfolded, independence movements gained momentum
in Africa, the Middle East, and Asia
19001945: Company internationalization. But the next globalization wave was
waiting in the wings, and companies began to replace countries as the major
catalysts of economic and cultural change. A Belgian company established the first
foreign subsidiary in Prussia (todays Germany) in 1837, and commensurate with
their overseas interests, most European investments up to 1945 were coloniesbased. As a result of their industrialization and colonization efforts then, Western
Europe was the center of international business at the turn of the last century. In
recognition of this trend, Japanese trading companies such as Mitsui and the
Yokohama Specie Bank had set up offices in Western Europe in the 1880s, along
with numerous Japanese shipping and insurance companies.
19451980: Era of increasing international competition. It was not until the
1950s that corporations began to reassert themselves in international markets. The
United States, whose economy had suffered least in World War II, was the first to
reinitiate foreign investments, and during the 1950s and 1960s U.S. firms
established secure footholds in Canada and in the re-emerging Western European
economy. The 1960s and 1970s saw the revitalization and expansion of Japanese
and European firms in the international marketplace as market blocs such as the
European Economic Community (todays European Union) and free trade
movements increased the number of opportunities in the worldwide marketplace.
During this period, the Cold War political rivalry between the United States and the
USSR dampened commercial prospects.

THE GLOBALIZATION ERA SINCE 1980

During the 1980s, the world marketplace changed yet again. The collapse of
communism and the industrialization of developing markets led to significant
increases in global commerce. The internationalization of North American, Western
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European, and Japanese firms had contributed to an upsurge of commercial

activities in the developing world, and by the 1990s, developing market competitors
were entering world markets, including Petrleos de Venezuela; Daewoo, Samsung,
Hyundai, and LG Group (Korea); Cemex and Gruma (Mexico); and Petroleo Brasileiro,
Vale do Rio Doce, and Cervejaria Brahma (Brazil). As the new millennium got
underway, companies from the developing
and transition economies (China, Argentina, Philippines, South Africa, Malaysia,
Singapore, and India, among others) were internationalizing and heightening
competition in the world marketplace. Cumulatively, they invested $193 billion
abroad in 200616 percent of world investment flows.

The Major Catalysts of Post-1980 Globalization

International trade. The world hasmoved irrevocably toward free trade since
1945 through the efforts of the General Agreement on Tariffs and Trade (GATT, a
United Nations agency) until 1995, and since that time, through GATTs
replacement, the World Trade Organization (WTO). The results have been dramatic.
Since 1945, tariffs have fallen from an average of over 40 percent for industrial
goods to less than 4 percent. World trade expanded from $2 trillion in 1980 to about
$10 trillion in 2005. The expansion of world trade has been aided by the UNs
International Monetary Fund (IMF), which monitors foreign exchange rate values
among nations and provides aid to countries with international debt problems.
Increasingly efficient air and ocean transportation systems have also aided
international trade expansion.
Trade blocs. For some countries, the worldwide liberalization of trade and
commerce did not occur fast enough, and countries got together to form trade blocs
to facilitate commercial interactions among members. The European Economic
Community (now the European Union) was formed in 1957. Since then, trade blocs
have been formed in North America (North American Free Trade Area), South
America (the Mercosur and Andean Pact groups), and also in Asia and Africa.
Foreign direct investments (FDI) occur when international companies make
investments in factories, plants, and machinery in nondomestic markets. As firms
have increased their international commitments, FDI has grown from $615 billion in
1980 to over $12 trillion in 2006. Nation-states, recognizing the economic stimulus
FDI provides, have increasingly worked to make their economies more attractive to
international corporate investors.
Throughout history, there have been three major reasons for international business
expansion. In early times (16th through 20th centuries), explorers looked for new
resources (often gold, silver, or mineral deposits). Then, as countries began to
develop, businesspeople began to regard distant nations as markets (the Colonial
Era). Finally, as free trade movements took hold after 1945, efficiency-seeking
companies looked to overseas markets as manufacturing sites to lower global costs
of doing business. Today, all three major motives (resource seekers, market-seekers,
efficiency-seekers) are reasons why firms invest abroad.
Global movements toward capitalism. The demise of communism in the 1980s
and 1990s left little competition for capitalism to be the worlds dominant economic
and political philosophy. Since that time, Latin America, Eastern Europe, and Asia
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have slowly opened up their markets and become active participants in the global
marketplace. Within national markets, former government-owned industrial
monopolies such as airlines, telecommunications, energy, and utilities have been
sold back into the private sector (privatization), and their markets deregulated to
allow companies to compete for market share and profits.
Technology and global media. The advent of satellite, computer, and Internet
technologies has transformed worldwide communications and facilitated information
flows among nations, companies, and individuals. At the nation-state level, it has
become increasingly difficult for countries to isolate their citizens from outside
influences, and consumers worldwide have begun to enjoy the benefits of the
international marketplace. Companies now have superior abilities to coordinate
activities, products, and strategies across markets, and individuals have increased
access to new ideas, philosophies, products, and lifestyles.
Globalization and the Developing World
Up to 1985, the Triad nations of North America, Western Europe, and Japan were
dominant in world commerce, and are still today the major providers of global
capital. But as developing markets opened up to trade and investments, new ideas
and technologies began to contribute to economic and cultural change. Trade and
investments brought many new (and affordable) products to developing nations.
The advent of global media made information more readily available to developing
nation publics that, coupled with moves toward democratization, have made
politicians more accountable to their electors.
But the diffusion of technologies and consequent modernization processes have
barely affected many emerging markets, where large percentages of national
populations still reside in agriculturally based rural areas, largely untouched by
modernization trends. As the United Nations noted,
Modernization, Westernization, and Americanization
Transfers of technology and foreign intrusions into national cultures have been
occurring for hundreds of years. Starting with the European colonization movement
of the 16th century, and proceeding through the industrial revolutions of the 18th
and 19th centuries, the spread of technology has jumpstarted modernization
movements in many countries as scientific and technological advances have
upgraded national lifestyles and aided efficient resource use. In contrast,
Westernization can be defined as the inculcation of (mainly) U.S. and European
values on national cultures. As major international traders throughout the 20th
century, U.S. and European influences on other nations lifestyles has been
extensive, and as U.S. power has increased, so Americanization has become
synonymous with Westernization. Hollywood movies dominate the world market
with 70 percent market share in the European Union and over 50 percent of the
Japanese market.

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INTERNATIONAL BUSINESS THEORIES

THEORIES OF INTERNATIONAL TRADE
Theoreticians seek general explanations of phenomena in order to 'see the wood
from the trees' and to make sense of what otherwise would be a bewildering array
of seemingly random items of information. Theories of international business
attempt to answer two questions: why nations trade, and what determines the
pattern of international investment.
1. Comparative cost theory
In his famous book The Wealth of Nations (published in 1776) Adam Smith put
forward the theory that international trade would occur in situations where nations
had 'absolute advantages' over rival states, i.e. they Could produce with a given
amount of labour and capital larger outputs of certain items than any other country.
The flaw in this argument is that it fails to explain why countries with an absolute
disadvantage in all their products (i.e. countries which produce less of everything
made within the country, using a given amount of labour and capital, than other
nations) still engage in international trade. A possible resolution of this question was
suggested by the eminent economist David Ricardo, who in 1817 alleged that trade
among nations resulted from differences in the 'comparative' advantages of
countries in the production of various items, not differences in absolute
Table 1.1

Item A

Item B

3 days labour

4 days labour

6 days labour

5 days labour

Country 1
Country 2

advantage. Ricardo assumed that the cost of producing any good depended only on
the amount of labour used in its production, and that firms and workers could not
move freely between nations (a reasonable assumption for the early 1800s).
The theory is illustrated by Table 1.1, which shows the time needed to produce two
hypothetical items in two different countries. It takes more days of labour to
produce both items in country 2 than in country 1, so that country 2 has an absolute
disadvantage in the production of each item. Ricardo assumed (importantly) that
one unit of item A would be exchanged for one unit of item B, i.e. that a person in

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country 1 with a single unit of A could sell it to someone in country 2 in return for a
single unit of B, and vice versa.
In this example trade will still benefit both countries because country 1 has a
comparative advantage in the production of item A (it can produce a unit of item A
in fewer days than it takes to produce item B) while country 2 has a comparative
advantage in item B. If country 1 makes and exchanges a unit of A in return for a
unit of B from country 2 then it obtains for an outlay of 3 days labour an item that
would require 4 days labour if it were produced at home. Equally, country 2 benefits
from the transaction as it receives for a cost of 5 days labour an item that would
need 6 days if produced domestically. Hence trade is profitable for all concerned.
Although fascinating, Ricardo's solution rests on the severe assumptions that:

Firms in country 2 cannot move their operations to country 1 where both

items can be produced at lower cost.

Only the amount of labour used in production determines the cost of an item.
This ignores the impact of technical advances on the use of capital
equipment.

Items exchange for each other at a predetermined and constant ratio.

Also, the theory does not explain why certain goods are cheaper in certain
countries. This issue was addressed by E. Heckscher and B. Ohlin in the 1930s.
2. The Heckscher-Ohlin theory of international trade
According to the Heckscher-Ohlin theory, goods prices differ because production
costs differ, and production costs themselves depend on the amount and costs of
labour, capital and natural resources used when making various products. Each
country possesses a specific mix of labour, capital and other 'factor endowments':
some have abundant supplies of labour; others are rich in natural resources, etc. If
an item embodies a large amount of labour, and if labour is cheap and plentiful in
the producing country, then that product will be cheap by international comparison
and thus likely to be exported to the rest of the world. In general, a country will
export those items which incorporate relatively large amounts of its most abundant
factor, and import those products which include relatively small amounts of the
factor with which it is least endowed. In other words, differences in factor
endowments determine differences in comparative advantage, which themselves
shape the pattern of international trade.
Empirical performance of international trade theories
The comparative cost, Heckscher-Ohlin and other hypotheses relating to
international trade have been tested extensively and, alas, no firm conclusions have
emerged. Indeed, much empirical evidence flatly rejects the fundamental
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propositions of these theories. Extensions and modifications of conventional

international trade theory have led to increasingly complex models, which
themselves give rise to further problems and contradictory results.
Factors that might confound orthodox trade theories include:
a) The rapid pace of technological development, which causes national advantage
to shift frequently and in unpredictable ways.
b) Skilful marketing that can increase foreign demand for relatively expensive
exported goods.
c) Governments regularly seeking to improve national balance of payments
positions via the imposition of tariffs, import and exchange controls, etc.
d) The fact, that trade theories regard nation states as independent trading units.
In reality large multinational companies shift goods, services and capital among
their subsidiaries in various countries at prices quite different to those at which a
firm in one country would sell to a customer in another.
e) Poorer countries often having national economic development plans which
encourage the importation of capital goods that otherwise would not have a market
in these nations.
f) Multinational companies frequently shifting from exporting to particular countries
to local production in those countries.
g) Sparcity and inaccuracy of the information upon which firms base their
international trading decisions.
3. The work of Michael Porter
Observing that traditional economic theories fail to explain why certain
countries have succeeded in the post-Second World War era, M. E. Porter put
forward a fresh hypothesis concerning the basic determinants of the national
competitive advantages that lead to international trade. Porter's analysis begins
from the following propositions:
a) The capacity to automate complete production processes means that workforce
costs and competencies are not as critically important to successful operations as
they once were.
b) Companies today are increasingly international in outlook and able to shift
operations from country to country at will.
c) The rise of the multinational corporation has broken the link between corporate
efficiency and the quality and availability of resources (labour, capital, etc.) within

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the firm's own country. An MNC is not dependent on the resource base of just one
nation; it operates wherever and whenever conditions are favourable.
d) The workforces and capital market arrangements of many industrialized countries
are today broadly comparable, so that companies have greater choice over where
they can locate activities. Hence the pressures of supply and demand will tend in
the long term to equalise the costs of skilled labour and capital in these countries.
Today, automated equipment can easily be substituted for labour, and modern
technology enables the creation of synthetic substitutes for expensive raw
materials.
These new realities, Porter argues, mean that firms need constantly to seek new
sources of competitive advantage. In particular they need to operate internationally
in order to fine-tune their competitive strengths and to identify and then remove
weaknesses. Selling to the most demanding consumers causes a firm to achieve
quality and service levels it would not otherwise attain. The key determinant of
contemporary national competitive advantage, Porter suggests, is product and
process innovation - not cheap labour or an abundance of natural resources. Indeed,
lack of the latter can actually spur a country to a high level of technological
innovation.
According to Porter, six sets of variables determine a nation's ability to compete
internationally, namely:
1) Demand conditions: the strength and nature of domestic demand; consumer
desires, perceptions and levels of sophistication.
2) Factor conditions: skilled labour, road and rail infrastructure, natural resources,
etc.
3) Firm strategy, structure and rivalry: the organisation and management of
companies and the extent of domestic competition.
4) Related and supporting industries: extent of supply industries, ancillary business
services, input component manufacturers and so on.
5) Government policies, including rules on business competition, state intervention
in industry, regional development, health and education and (importantly)
vocational training.
6) Luck and chance.
Porter analysed data on the world's major industrial and trading nations and arrived at the
following conclusions:
a)Lack of national resources (e.g. of oil, labour, minerals, etc.) can spur a country to
a high level of innovation.

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b) To be successful nations must move from having factor-driven to having

investment-driven economies, followed by a further move to an innovation- driven
economy. The latter contrasts with the 'wealth-driven' economies of certain
countries, which have complacent businesses and are in decline despite per capita
GDP continuing to rise.
c) The creation of domestic monopolies through mergers and takeovers creates
moribund economic environments that are not conducive to innovation; even
though domestic monopolies may have to compete fiercely on the international
level.
d) Nations with governments that have been heavily involved with industries have
generally been the least successful.
4. Mercantilism
Developed in the sixteenth century, mercantilism was one of the earliest efforts to
develop an economic theory. This theory stated that a countrys wealth was
determined by the amount of its gold and silver holdings. In its simplest sense,
mercantilists believed that a country should increase its holdings of gold and silver
by promoting exports and discouraging imports. In other words, if people in other
countries buy more from you (exports) than they sell to you (imports), then they
have to pay you the difference in gold and silver. The objective of each country was
to have a trade surplus, or a situation where the value of exports are greater than
the value of imports, and to avoid a trade deficit, or a situation where the value of
imports is greater than the value of exports. A closer look at world history from the
1500s to the late 1800s helps explain why mercantilism flourished. The 1500s
marked the rise of new nation-states, whose rulers wanted to strengthen their
nations by building larger armies and national institutions. By increasing exports
and trade, these rulers were able to amass more gold and wealth for their countries.
One way that many of these new nations promoted exports was to impose
restrictions on imports. This strategy is called protectionism and is still used today.

5. Leontief Paradox
In the early 1950s, Russian-born American economist Wassily W. Leontief studied
the US economy closely and noted that the United States was abundant in capital
and, therefore, should export more capital-intensive goods. However, his research
using actual data showed the opposite: the United States was importing more
capital-intensive goods. According to the factor proportions theory, the United
States should have been importing labor-intensive goods, but instead it was actually
exporting them. His analysis became known as the Leontief Paradox because it was
the reverse of what was expected by the factor proportions theory. In subsequent
years, economists have noted historically at that point in time, labor in the United
States was both available in steady supply and more productive than in many other
countries; hence it made sense to export labor-intensive goods. Over the decades,
many economists have used theories and data to explain and minimize the impact
of the paradox. However, what remains clear is that international trade is complex
15

and is impacted by numerous and often-changing factors. Trade cannot be

explained neatly by one single theory, and more importantly, our understanding of
international trade theories continues to evolve.
THEORIES OF INTERNATIONAL INVESTMENT
1. The product life cycle theory of international investment
The product life cycle (PLC) hypothesis asserts that, like people, products are
conceived and born, mature, decline and eventually die. Hence, a product has a 'life
cycle' comprising a series of stages. The introductory phase is characterized by high
expenditures (for market research, test marketing, launch costs, etc.) and possibly
by financial losses. Early customers will be attracted by the novelty of the item.
Typically, these customers are younger, better educated and more affluent than the
rest of the population. No competition is experienced at this stage. There is
extensive advertising during the introduction, the aim being to create product
awareness and loyalty to the brand.
There should now follow a period of growth, during which conventional consumers
begin to purchase the product. Competition appears at this stage. Then the product
enters its maturity phase. Here the aim is to stabilise market share and make the
product attractive (through improvements in design and presentation) to new
market segments. Extra features might be added, quality improved, and distribution
systems widened. Competition intensifies; appropriate strategies now include extra
promotional activity, price cutting to improve market share, and finding new uses
for the product. Eventually, the market is saturated and the product enters its phase
of decline. Public tastes might have altered, or the product may be technically
obsolete. Sales and profits fall. The product's life should now be terminated,
otherwise increasing amounts of time, effort and resources will be devoted to the
maintenance of a failing product.
It could be, however that, a product that has reached the end of its life cycle in one
country may have a fresh lease of life elsewhere. Indeed, L. T. Wells advanced the
theory that product life cycles explain the pattern of direct foreign investment in
developing countries by western MNCs. According to the argument, an item is
introduced to a developing country and, at first, has little or no serious competition.
Then the product is imitated by local suppliers so that several companies now sell
the item. Hence, product differentiation via the addition of new features, provision
of service facilities, etc., becomes necessary in order to secure a competitive edge.
Local competitors might even improve upon the product and begin to export their
versions of it to the originating firm's own country. Competition intensifies, and price
cutting occurs until the product is no longer profitable for the foreign exporter to
supply. Note how foreign imitators might enjoy lower labour and other local
production costs, and spend nothing on new product development. The exporter
conversely has to pay transport costs plus import duties. Thus the exporting
16

company is likely to establish its own local manufacturing facilities in order to be

able to compete on price with local firms. Also it must quickly create a strong brand
image and effective communications with agents and distributors 'in the field'. Thus
direct foreign investment (DFI) in less developed economies by firms from richer
nations was the only way they could compete against locally based low-cost
imitating businesses.
Empirical evidence tended to support this theory during the 1950s and early 1960s,
but not thereafter, possibly for the following reasons:
a) New product innovation is today so rapid that product life cycles are too short for
it to be worthwhile establishing foreign production facilities dedicated to a particular
item.
b) Although firms in less developed countries may be able to produce products
cheaper than western rivals they cannot necessarily transport, market and
distribute them efficiently.
c) In practice, MNCs often launch new products in developed and underdeveloped
countries simultaneously.
d) MNCs frequently choose low-cost countries as production sites for the worldwide
sale of a good, i.e. no production occurs in economically advanced nations.
e) As alternatives to DFI, Western firms may engage in licensing or contract
manufacturing in order to produce goods in less developed countries.
There are, moreover, a number of fundamental problems with the basic PLC
hypothesis itself. The length of life of a new product cannot be reliably predicted in
advance, and many products cannot be characterized in life cycle terms (basic
foodstuffs, or industrial materials for instance). Importantly, variations in marketing
effort will affect the durations of life cycle phases and determine the timing of
transitions from one stage to the next. Products do not face inevitable death within
predetermined periods: the termination of a product's life is very much a
management decision. In many cases a product's lifespan may be extended by
skilful marketing. Also, management can never be sure of the phase in its life cycle
in which a product happens to be at a particular time. How, for instance, could
management know that a product is near the start and not the end of its growth
phase, or that a fall in sales is a temporary event rather than the start of a product's
decline?
The expected demise of a product can become a self-fulfilling reality; management
may assume wrongly that sales are about to decline and consequently withdraw
resources from the marketing of that product. Hence, in the absence of advertising,
merchandising, promotional activity, etc., sales do fall and the product is
withdrawn! Yet another problem is the enormous number of (sometimes random)
17

factors that can influence the durations of phases, turning points and levels of sales.
Competitors' behavior may be the primary determinant of the firm's sales,
regardless of the age of the product.
2. Market imperfections and monopolistic advantage theories
These assert that large firms engage in international business in order to create
near monopoly conditions for their operations. Thus, for example:

Cross-border patent licensing agreements carve up foreign markets and

prevent competition in relation to the patented item.

Foreign production in countries with very low labour and other costs followed
by the export of the resulting output to the parent company's home nation
enables the company to undercut its domestic competitors and drive them
out of business.

Acquisition of foreign sources of raw materials and/or other inputs or of

foreign distribution outlets means that the firm 'internalises' the entire
procurement, supply and distribution system within a single organisation,
hence reducing uncertainties and risks and restricting competition.

More generally, 'imperfections' in foreign market conditions are said to explain

international investment by companies. Stephen Hymer, for example, has argued
that firms only invest abroad if they have attributes not possessed by local foreign
rivals and there are barriers ('market imperfections') that prevent these rivals from
obtaining the attributes of the foreign company. Attributes could relate to
economies of scale in production, marketing or organizational management skills;
preferential access to finance or raw materials; or the use of a superior technology.
These advantages must be of a magnitude sufficient to offset the costs of operating
abroad (need to conduct research into the local market, foreign exchange risks,
transport costs, etc.) and, subsequent writers have suggested, may be 'firm
specific', 'ownership specific', or 'location specific'.
Ownership-specific factors relate to such matters as the extent of a company's
share capital, receipt of government grants and subsidies, and proprietary rights
over intellectual property. Location-specific advantages include low prices for locally
purchased inputs, low transport costs, easy communications, availability of local
business support services (advertising agencies, market research firms, etc.), a
skilled and low-cost labour force, and the avoidance of trade restrictions imposed by
the host country government in order to reduce imports. Other relevant factors are
market size and rate of growth and the extent of local competition. Examples of
firm-specific advantages are the ownership of well-known brands, special marketing
skills, attractive product features, patents, economies of scale or access to capital
markets.
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3. Dunning's eclectic theory of international production

John Dunning's 'eclectic theory' of foreign investment asserts that the likelihood of a
firm investing abroad depends essentially on firm-specific factors, location-specific
factors that make it advantageous to invest in a particular country, and
'internalization' advantages which cause the internal transfer of labour, capital and
technical knowledge within the firm to be more cost- effective than using outsiders,
such as licensees, import agents, distributors and so on.
Internalization
Arguably, firms invest directly in other countries in order to cut out the use of
(expensive) suppliers and distributors. Hence all stages in the supply process are
brought under a common ownership so that the full benefits of research and
development can be obtained (by avoiding the use of licensees), and working
capital better utilized. Also foreign government import regulations might be avoided
through producing in a local subsidiary rather than exporting direct. All aspects of
marketing will be controlled by the supplying firm, and there are no intermediate
sales or value added taxes. Knowledge can be transferred around the company at
will. Note however that extra costs have to be incurred by a firm that does things for
itself rather than using outsiders. Internal communication and administration costs
increase and there are additional costs associated with having to operate in
unfamiliar environments.
Problems with theoretical models of DFI
While interesting in themselves, none of the models previously outlined is
sufficiently general to explain all aspects of the foreign investment behaviour of
international companies. Each theory purports to give reasons for certain
investment activities, but contradictory evidence can be advanced against all of
them in certain circumstances. The theories are partial and incomplete and adopt
different ideological perspectives. In particular, these theories tend to ignore the
influences of the psycho-social and other human aspects of international
managerial behaviour, and of the governments of nation states. Theories of
international investment sometimes contradict each other, and should really be
regarded as 'opinions' rather than as theories capable of empirical verification.
Arguably, moreover, the field of international business is so complex and fast
changing and covers so many disparate elements that no general theory can be
valid for very long.

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International business competitive Forces (A comparative analysis)

Absolute and Comparative Advantage
Comparative advantage emphasizes nationally endowed factors, differences in
international technology/productivity, external economies, and international
policies. Comparative advantage focuses on the relative productivity differences.
The literature on international trade and policy contains a number of reasons why a
country may have an advantage in exporting a commodity to another country. For
convenience, most of these reasons may be classified into (1) technological
superiority, (2) resource endowments, (3) demand patterns, and (4) commercial
policies.
Technological Superiority
Adam Smiths principle of absolute advantage and David Ricardos principle of
comparative advantage, in general, are based on the technological superiority of
one country over another country in producing a commodity. Absolute advantage
refers to a country having higher (absolute) productivity or lower cost in producing a
commodity compared to another country. However, absolute advantage in the
production of a commodity is neither necessary nor sufficient for mutually beneficial
trade. For example, a country may be experiencing absolute disadvantage in the
production of all commodities compared to another country, yet the country may
derive benefits by engaging in international trade with other countries, due to
relative (comparative) advantage in the production of some commodities vis--vis
other countries. Likewise, absolute advantage in the production of a commodity is
not sufficient, since the country may not have relative (comparative) advantage in
the production of that commodity. David Ricardos principle of comparative
advantage does not require a higher absolute productivity but only a higher relative
productivity (a weaker assumption) in producing a commodity. Pre-trade relative
productivities/costs determine the pre-trade relative prices. Pre-trade relative prices
in each country determine the range of possible terms of trade for the trading
partners. Actual terms of trade within this range, in general, depend on demand
patterns, which, in turn determines the gains from trade for each trading partner.
The Ricardian model assumes constant productivity, as there is only one factor of
production (labour), and therefore constant (opportunity) costs that leads to
complete specialization. However, increasing opportunity costs that often arise in
multi-factor situations (law of diminishing returns) due to limited quantity of some
factors specific to an industry can easily be accommodated to allow for incomplete
specialization. Thus, in the Ricardian model, technological differences in two
countries are the major source of movement of commodities across national
boundaries.

20

While the principle of comparative advantage as expounded by David Ricardo was

couched in terms of technological superiority, the principle, when phrased in terms
of comparing opportunity cost or relative prices of goods and services between
countries is sufficiently general to encompass a variety of circumstances.
Furthermore, although Ricardos explanation of comparative advantage was in static
terms, comparative advantage is a dynamic concept. A countrys comparative
advantage in a product can change over time due to changes in any of the
determinants of comparative advantage including resource endowments,
technology, demand patterns, specialization, business practices, and government
policies.
Resource Endowments
Availability of resources in a country provides another source of comparative
advantage for countries that do not necessarily possess a superior technology.
Under certain restrictive assumptions, comparative advantage can be obtained due
to differences in relative factor endowments. As propounded by Hecksher and Ohlin,
a country has a comparative advantage in the production of that commodity which
uses the relatively abundant resource in that country more intensively. For example,
newsprint uses natural resources (forest products) more intensively compared to
textiles. Textiles use labour (L) more intensively compared to newsprint. Canada is
relatively abundant in natural resources (R) compared to India. (R/L) Canada > (R/L)
India. This implies R will be relatively cheaper in Canada as compared to India. Thus,
Canada has a comparative advantage in newsprint and will therefore specialize and
export newsprint to India. Likewise, India has a comparative advantage in textiles
and will therefore specialize and export textiles to Canada.
Human skills: Human skills can also be considered a resource. Countries with
relatively abundant human skills will have a comparative advantage in products that
use human skills more intensively. Certain products such as electronics require a
highly skilled labour force (such as engineers, programmers, designers, and other
professional personnel). Such products may gain comparative advantage in
countries (such as Taiwan, Singapore, Hong Kong) that are relatively better endowed
with such skilled labour. (Keesing, 1966). Government policies aimed at better
education and training can create such an endowment.
Economies of Scale: Economies of scale can provide comparative advantage by
lowering production costs. External economies that operate by shifting the average
cost of firms downward can in fact occur due to an industrial policy or a proactive
role of the government in providing better infrastructure and/or a better educated or
trained labour force. Such economies of scale are consistent with Ricardian and
Factor Proportions models. Economies of scale (internal) achieved through the
existence of a large home market and/or some policy-induced accessibility to a
larger market outside the nation (say due to a customs union) also imply lower
production costs. This may boost or create a comparative advantage for the
industry experiencing such economies of scale.
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Technological Gap (Benefits of an Early Start) and Product Cycle: Industrially

advanced nations in general had an early start in most manufactured products and
services, which allowed them to enjoy large national and international markets.
Industrially advanced nations were thus able to export new products until such time
that the products were produced by other low factor cost countries. Vernons (1966)
Product Cycle hypothesis emphasizes the importance of the nature and size of
home demand for new products in highly industrialized countries. Since, initially, the
new product involves experimentation of the features of the product as well as the
production process, the countries that have sufficient home demand for such
products produce and export them. As the specific nature of demand becomes more
universal and the technology more easily available to others, the nation loses
comparative advantage in that product. Meanwhile, the firms are likely to have
developed another product that enables the nation to gain comparative advantage
in that product.
Demand Patterns: Demand Considerations
The role of demand and the size of the home market for products are already
evident in (1) establishing the equilibrium terms of trade and therefore the division
of gains from trade; (2) economies of scale; and (3) product cycle hypothesis. In
addition, Linder (1961) emphasized the role of demand in the home market as a
stepping stone towards success in international markets. According to Linder,
manufacturers initiate the production of a new product to satisfy the local market. In
this step, they learn the necessary skills for making the product by more efficient
techniques, which in turn, give these nations comparative, advantage in the product
vis--vis other countries. Linders thesis postulates exporting the product to
countries with similar tastes/demand patterns. The theory, coupled with market
imperfections and product differentiation can explain a large portion of intraindustry trade among the industrialized nations.
National and International Policies
National policies towards infrastructure, export promotion, education and training,
R&D policy related to export industries can go a long way in creating and sustaining
comparative advantage. Industrial policies such as production subsidies, tax
preferences, restricted tendering of Government contracts, anti-trust policy, and a
number of other means are often used to provide an advantage to domestic
industries. Likewise, the commercial policies aimed at restricting imports through
tariffs, quotas, voluntary export restraints, import licensing, local content rules,
restriction on outsourcing, escape clauses, etc. have been used to the advantage of
domestic import competing industries. Policy driven benefits realized by the
industries through internal and/or external economies, in the long run, may become
a source of comparative advantage to these industries. The 1965 Auto-Pact
between Canada and the USA is a good example of targeting individual industries to
influence production and trade through national policies. The trade creation and
22

trade diversion effects of customs unions/free trade areas are well known in the
literature. Further, the policies pursued by international organizations such as the
World Bank, the IMF and the WTO can also become a source of comparative
advantage/disadvantage to some industries in countries affected by such policies.
Dynamic Gains /Comparative Advantage
International trade, through a better allocation of resources, increases incomes,
saving, and investment, thus enabling a country to realize higher growth even in
fully employed economies. In addition, for developing countries, trade can enable
them to transform consumption goods and raw materials into capital goods as well
as gain technological know-how from technologically advanced countries. Trade can
also provide demand stimulus to the lagging (excess capacity of some factors of
production) economies. Furthermore, specialization through trade benefits not only
the export industry, but all other industries (through increased demand for their
products) related to the export industries. Lastly, by increasing the size of national
market and thereby the size of production facilities, domestic firms can reap both
external and internal economies of scale. International trade also implies more
competitive pressures on domestic firms that stimulate research and development.
All these considerations yielding comparative advantage to the nation may be seen
as a framework of a number of forces that can be portrayed. Obviously, the firms
specializing within the industries that have comparative advantage are on a much
stronger footing to derive competitive advantage in producing standardized or
differentiated products within that industry. In this framework, technology,
resources, demand and the trade-enhancing policies are depicted as four forces
influencing the comparative advantage of a nation in a commodity/service vis--vis
other countries. Dynamic elements influencing comparative advantage are also
included in these forces.

Competitive advantage/absolute advantage

Competitive advantage relies heavily on the firm-specific factors such created
factors, created demand for the product, and internal economies achieved
through innovation. Smith offered a new trade theory called absolute advantage,
which focused on the ability of a country to produce a good more efficiently than
another nation. Absolute advantage looks at the absolute productivity.
Porter (1985) emphasized competitiveness at the level of a firm in terms of
competitive strategies such as low cost and/or product differentiation. A number of
writers on competitive advantage have focused on the determinants/sources of
competitive advantage such as important attributes of the firm: rareness, value,
inability to be imitated, and inability to be substituted (Barney, 1991); important
potential resources classified as financial, physical, legal, human, organizational,
informational, and rational (Hunt and Morgan, 1995); ability in developing superior
core competencies in combining their skills and resources (Prahalad and Hamel,
23

1990); a set of dynamic capabilitiescapabilities of possessing and allocating and

upgrading distinctive resources. Luo (2000). A number of studies have also analysed
the role of individual factors such as intellectual property rights, trade secrets, data
bases, the culture of organization, etc. (Hall, 1993), ethics capability (Buller and
McEvoy, 1999), corporate reputation (Ljubojevic, 2003), diversity in workplace
(Lattimer, 2003) and corporate philanthropy (Porter and Kramer, 2002). The central
focus of these contributions is still on firm-specific factors of competitive advantage.

Porters National Competitive Advantage Theory

Porter identified four determinants that he linked together. The four determinants
are (1) local market resources and capabilities, (2) local market demand conditions,
(3) local suppliers and complementary industries, and (4) local firm characteristics .
1. Local market resources and capabilities (factor conditions). Porter
recognized the value of the factor proportions theory, which considers a nations
resources (e.g., natural resources and available labor) as key factors in determining
what products a country will import or export. Porter added to these basic factors a
new list of advanced factors, which he defined as skilled labor, investments in
education, technology, and infrastructure. He perceived these advanced factors as
providing a country with a sustainable competitive advantage.
2. Local market demand conditions. Porter believed that a sophisticated home
market is critical to ensuring ongoing innovation, thereby creating a sustainable
competitive advantage. Companies whose domestic markets are sophisticated,
trendsetting, and demanding forces continuous innovation and the development of
new products and technologies. Many sources credit the demanding US consumer
with forcing US software companies to continuously innovate, thus creating a
sustainable competitive advantage in software products and services.
3. Local suppliers and complementary industries. To remain competitive, large
global firms benefit from having strong, efficient supporting and related industries
to provide the inputs required by the industry. Certain industries cluster
geographically, which provides efficiencies and productivity.
4. Local firm characteristics. Local firm characteristics include firm strategy,
industry structure, and industry rivalry. Local strategy affects a firms
competitiveness. A healthy level of rivalry between local firms will spur innovation
and competitiveness.

Industry analysis and structure

Business strategy involves identifying and exploiting the resources and capabilities
of the firm in the marketplace for the purpose of gaining competitive advantage and
superior financial performance. Inherent in this definition is the need to continuously
renew these resources and capabilities, to determine a set of goals and objectives
24

for the enterprise when it does gain competitive advantage, to understand the
structure of the marketplace and of the competitive situation faced by the firm, and
to devise, assess, and choose among a set of strategic options for the firm. A fully
developed strategy must also be suitable to the macro-environment of the
enterprise and must develop organizational solutions to execute otherwise abstract
plans.
The major aspects of strategy analysis include: setting goals and objectives,
performing competitive and industry analysis, analyzing resources and capabilities,
developing strategic options, choosing a strategy, and implementing that strategy,
with feedback loops among all the processes.

The Strategic Analysis Process

25

International business involves a specific set of issues whose strategic resolution

ties into the generic strategic analysis and involve (1) increasing geographic spread
(often referred to as internationalization), (2) achieving local adaptation (often
referred to as responsiveness), (3) building global integration (sometimes referred
to as globalization or global strategy), and (4) multi-business, multi-country, and
often multi-firm issues such as international strategic alliances and global mergers
and acquisitions.

International Strategy Issues

26

Although the last international issue of multi-business/multi-firm/multinational

moves tends to require heavy emphasis on all five strategic analysis processes. We
see heavy reliance on goal setting, industry analysis, and resource assessment as
firms expand internationally. Adaptation and integration are driven largely by issues
developed through competitive analysis and resource assessment, while integration
must also consider issues revealed by different means of assessing strategic
conditions and opportunities.
Resources and Capabilities for Geographic Spread
The concept of resources and capabilities developed in the strategy literature (e.g.
Wernerfelt, 1984; Grant, 1991) applies very well to the international strategy issue
of geographic spread. Companies that own or access unique resources and
capabilitiesdemonstrating unique core competencies in Hamel and Prahalad's
termsfind that international expansion gives them vast new opportunities to
leverage these expensive and valuable skills
Risk and Return in International Strategy
Another consideration in international expansion is risk reduction, whether financial,
business, or environmental. International expansion offers the opportunity to move
into markets that are not perfectly in phase with the home market.
Industry and Competitor Analysis for Geographic Spread
27

Classic industry and competitor analysis (Porter 1980 and 1985) can be applied to
geographic spread. Firms usually need an initial competitive advantage that they
can leverage into international markets. Then, in addition to the initial competitive
advantage, companies need to conduct classic industry analysis in each market, as
by using Porter's (1980) five forces framework to establish for each potential foreign
market what the likely prospects are for above average returns.
Industry structure analysis WBA/ Term paper

28