BUS804

International Business
Strategy 1-1

Lecture 2
Lecturer - Dr. Robert Jack

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Internationalisation of the firm’s value
chain

2 1-2
 Learning Objectives

• How can nations enhance their competitive

advantage?
• Why and how do firms internationalize?
• How can internationalizing firms gain and
sustain competitive advantage?
• Reference – Chapter 6 of your allocated text

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Theories of International Trade and Investment

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Theories of International Trade and Investment

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Theories of International Trade and Investment

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 Classical theories

• Most of the key theories under this category (see pp.

151-156 of your text) maybe familiar to you from
economics or international trade subjects:
• Absolute Advantage
• Competitive Advantage
• Factor Proportions Theory
• For BUS804 we do not intend to go through these in
detail

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Comparative vs. Competitive Advantage

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 Critical Role of Innovation
in National Economic Success

• Innovation is a key source of competitive

advantage.
• The firm innovates in four major ways. It can
develop:
(1) A new product or improve an existing product
(2) New ways of manufacturing
(3) New ways of marketing
(4) New ways of organizing company operations
• Many innovative firms in a nation leads to national
competitive advantage
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 Critical Role of Productivity
in National Economic Success

• Productivity is the value of the output produced by a

unit of labor or capital.
• It is a key source of competitive advantage for firms.
• The greater the productivity of the firm, the more
efficiently it uses its resources.
• The greater the aggregate productivity of the firms in
a nation, the more efficiently the nation uses its
resources.
• Aggregate productivity is a key determinant of the
nation’s standard of living.

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 Michael Porter’s Diamond Model:
Sources of National Competitive Advantage

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 The Diamond Model:
Sources of National Competitive Advantage (cont.)

• Factor conditions: Quality and quantity of labor,

natural resources, capital, technology, know-how,
entrepreneurship, and other factors of production

Example
An abundance of cost-effective and well-educated
workers gives China a competitive advantage in the
production of laptop computers.

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 The Diamond Model:
Sources of National Competitive Advantage (cont.)

• Related and supporting industries: The presence

of suppliers, competitors, and complementary firms
that excel within a given industry

Example
Silicon Valley in California is a great place to
launch a computer software firm because it is home
to thousands of knowledgeable firms and workers in
the software industry.

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 The Diamond Model:
Sources of National Competitive Advantage (cont.)

• Demand conditions at home: The strengths and

sophistication of customer demand

Example
Japan is a densely populated, hot, and humid country
with very demanding consumers. These conditions
led Japan to become one of the leading producers of
superior, compact air conditioners.

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 The Diamond Model:
Sources of National Competitive Advantage (cont.)
• Firm strategy, structure, and rivalry: The nature
of domestic rivalry and the conditions that
determine how a nation’s firms are created,
organized, and managed

Example
Italy has many top firms in design industries such as
textiles, furniture, lighting, and fashion. Vigorous
competitive rivalry puts these firms under constant
pressure to innovate, which has propelled Italy to a
leading position in design worldwide.

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 Industrial Cluster

• A concentration of suppliers and supporting firms

from the same industry located within the same
geographic area; similar to Porter’s Related and
Supporting Industries.
• A strong cluster can serve as an export platform for
the nation.
Examples
Silicon Valley; pharmaceutical cluster in Switzerland;
footwear industry in Pusan, South Korea; IT industry in
Bangalore, India; fashion cluster in northern Italy; and
Silicon Valley North near Ottawa, Canada
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 National Industrial Policy

• A proactive economic development plan

employed by the government to nurture or
support promising industry sectors with potential
for regional or global dominance. Initiatives can
include:
 Tax incentives
 Monetary and fiscal policies
 Rigorous educational system
 Investment in national infrastructure
 Strong legal and regulatory systems
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 Examples of National Industrial Policy

• In the 1990s, Vietnam’s government privatized

state enterprises and modernized the economy,
emphasizing competitive, export-driven industries.
Vietnam became one of the fastest-growing
economies, averaging around 8 percent annual
GDP growth.
• Singapore adopted pro-business, pro-investment,
export-oriented policies, combined with state-
directed investments in strategic corporations. The
approach stimulated economic growth that
averaged 8 percent annually from 1960 to 1999.
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 Examples of National Industrial Policy (cont.)

• New Zealand’s government, starting in 1984,

transformed the country from an agrarian,
protectionist, regulated economy to an
industrialized, free-market economy that today
competes globally.
• The Czech government in the 1990s created a
business-friendly legal and regulatory environment.
The country privatized state-owned companies.
Government FDI incentives attracted numerous
MNEs, such as Daewoo, ING, Siemens, and
Toyota.
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 Examples of National Industrial Policy (cont.)

• In the 1990s, Ireland

implemented various
pro-business policies—
fiscal, monetary, tax;
investment in education;
and emphasis on high-
value industries such as
pharma and IT—that
dramatically grew GDP
and reduced
unemployment.

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International Product Life Cycle Theory

• Each product and its associated manufacturing

technologies go through three stages of evolution:
introduction, maturity, and standardization.
• In the introduction stage, the inventor country
enjoys a monopoly both in manufacturing and
exports. Example: the television set.

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 International Product life Cycle Theory (cont.)

• In the maturity stage, the product’s manufacturing

becomes relatively standardized, and other
countries start producing and exporting the product.

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 International Product life Cycle Theory (cont.)

• In the standardization stage, manufacturing

ceases in the original innovator country, and this
country becomes a net importer of the product.
Today, due to globalization, the cycle occurs
quickly for many products.

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 New Trade Theory

• Argues that economies of scale are an important

factor in some industries for superior international
performance, even in the absence of superior
comparative advantages. Some industries succeed
best as their volume of production increases.

Example
The commercial aircraft industry has very high fixed
costs that necessitate high-volume sales to achieve
profitability.

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 Strategic implications for managers

• There are at least three main implications for

international businesses strategy from these
theories:
– location implications
– first-mover implications
– policy implications

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 Location

• Different countries have advantages in different

productive activities:
– these differences influence a firm’s decision about
where to locate productive activities
– it makes sense for a firm to disperse its various
productive activities to those countries where they can
be performed most efficiently

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 First-mover advantages
• Firms that establish a first-mover advantage in the
production of a new product may later dominate
global trade in that product:
– it can be worthwhile for a firm to invest resources in
trying to build first-mover advantages, even if it means
losses for a few years before a venture becomes
profitable

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 Government policy
• Government policies with respect to free trade or
protecting domestic industries can significantly
impact global competitiveness:
– businesses should work to encourage governmental
policies that support free trade

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 The internationalisation process
• These models evolved during the late 1970s and
early 1980s and represented two similar yet distinct
processes:
– Uppsala Model
• 1975, 1977, 1990
– Three key academics – Finn Wiedersheim-Paul, Jan Johanson and
Jan-Erik Vahlne
– Innovation Model
• 1980
– S. Tamer Cavusgil

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Stages in Company Internationalization
Innovation Model

Domestic Focus

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Stages in Company Internationalization
Innovation Model

Domestic Focus

Pre-export Stage

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Stages in Company Internationalization
Innovation Model

Domestic Focus

Pre-export Stage

Experimental Involvement

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Stages in Company Internationalization
Innovation Model

Domestic Focus

Pre-export Stage

Experimental Involvement

Active Involvement

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Stages in Company Internationalization
Innovation Model

Domestic Focus

Pre-export Stage

Experimental Involvement

Active Involvement

Committed Involvement
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Stages in Company Internationalization
Uppsala Model

• Stage one – no regular export activities

• Stage two – export via independent representatives
• Stage three – establishment of an overseas sales
subsidiary
• Stage four – overseas production/manufacturing

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Stages in Company Internationalization
Uppsala Model

• The Uppsala model suggests that international expansion

is influenced by managerial learning:
• Consequently, it proposes that internationalisation begins with low-
risk, indirect exporting to markets that are ‘psychically close’ or
similar to the firm’s home market:
• Assumption made is that the obstacle to internationalisation is a lack of
market knowledge and resources
• These obstacles are reduced through incremental decision-making
and learning about foreign markets and operations

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 How Firms Gain and Sustain
International Competitive Advantage

• Because the MNE was traditionally the major player

in international business, scholars have offered
numerous explanations of what makes these firms
pursue, and succeed in, internationalization.
• Because FDI has been MNEs’ main strategy in
international expansion, theoretical explanations
have tended to emphasize it.

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 FDI-Based Explanations:
Monopolistic Advantage Theory

• Argues that MNEs prefer FDI because it provides

the firm with control over resources and capabilities
in the foreign market and a degree of monopoly
power relative to foreign competitors.
• Key sources of monopolistic advantage include
proprietary knowledge, patents, unique know-how,
and sole ownership of other assets.

Example
Novartis earns substantial profits by marketing various
patent medications through its subsidiaries worldwide.

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 FDI-Based Explanations:
Internalization Theory
• Explains how the MNE chooses to acquire and retain
one or more value-chain activities inside itself.
• Such “internalization” provides the MNE with greater
control over its foreign operations.
• Internalization avoids the drawbacks of dealing with
external partners, such as reduced quality control and
the risk of losing proprietary assets to outsiders.

Example
In China, Intel owns much of its value chain, which ensures that
Intel knowledge, patents, and other assets are not misused or
illicitly obtained by potential rivals.

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 FDI-Based Explanations:
Dunning’s Eclectic Paradigm

• Three conditions determine whether or not a

company will enter a given foreign country via FDI:
1. Ownership-specific advantages: Knowledge, skills,
capabilities, relationships, or physical assets that the firm owns
and that are the basis of its competitive advantages
2. Location-specific advantages: Similar to comparative
advantages; specific advantages that exist in the country that
the MNE has entered, or is seeking to enter, such as natural
resources, low-cost labor, or skilled labor
3. Internalization advantages: Control derived from internalizing
foreign-based manufacturing, distribution, or other value-chain
activities

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 Example of the Eclectic Paradigm: Sony in China

• Ownership-Specific Advantages. Sony possesses

a huge stock of knowledge and patents in the
consumer electronics industry, as represented by
products like the Playstation and Vaio laptop.
• Location-Specific Advantages. Sony desires to
manufacture in China in order to take advantage of
China’s low-cost, highly knowledgeable labor force.
• Internalization Advantages. Sony wants to maintain
control over its knowledge, patents, manufacturing
processes, and quality of its products.
Thus, Sony entered China via FDI
See Exhibit 6.9 p. 168 for an overview of these 3 key
FDI theories
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 Non-FDI-Based Explanations:
International Collaborative Ventures

• A form of cooperation between two or more firms.

Partners pool resources and capabilities to create
synergies and share the risk of joint efforts.
• Starting in the 1980s, firms increasingly began
using collaborative ventures to expand abroad.
• Collaboration provides access to foreign partners’
know-how, capital, distribution channels, and
marketing assets. It also helps overcome
government-imposed obstacles.

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 Two Types of
International Collaborative Ventures

• Equity-based joint ventures result in the formation

of a new legal entity. In contrast to the wholly owned
FDI, the firm collaborates with local partner(s) to
reduce risk and commitment of capital.
• Project-based alliances do not require equity
commitment from the partners, but simply a
willingness to cooperate in R&D, manufacturing,
design, or any other value-adding activity. Because
project-based alliances have a narrowly defined
scope of activities and timeline, they provide greater
flexibility to the firm than equity-based ventures.

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