International Management for East Asia

Reasons for internationalize:

1. To expand sales: increasing opportunities through foreign markets, because of declining domestic sales, because of saturated domestic markets, because of excess of capacity
2. To acquire resources: lower costs, new and better products, additional knowledge
3. To minimize risks: smoothing sales and profits, softening the impact of price swings or input shortages in specific countries, preventing competitors from gaining advantages in national markets where the firm already operates
4. To exploit proprietary assets: strong brands, technologies, capabilities, production processes, any asset that has proven successful and creates a competitive advantage: a situation in which the company has a systematically higher performance than its competitors, it has resources and capabilities that are unique to that company

The International business toolbox: FSAs-CSAs (Foreign Specific Assets and country specific assets) and the Eclectic Theory (Barkley) -> internal analysis

utilizzano per gestire internamente le attività che potrebbero essere svolte da terzi. Questo vantaggio può derivare da economie di scala, controllo di risorse critiche o conoscenza specifica del settore.have when they are able to control an activity within the boundaries of the firm instead of relying on partners. The benefit of controlling and coordinating interdependent economic activities within a firm's organization across geographies, rather than through external partners or the market (for example through licensing, outsourcing or selling them). According to the way in which these advantages are combined, we can select the best entry mode. If the ownership advantage is able to provide a privileged position compared to competitors in the foreign market, the company is ready to internationalize. No ownership advantage -> remain domestic. If there is ownership advantage, the company should consider location advantage (cheap offer, high tariffs, Human Resources, reduce geographic distance). No location advantage -> export (more flexible type of entry mode). If there is a location advantage, the company should see if there is an internalization advantage -> FDI (foreign subsidiaries). Nointernalization advantage -> collaborative mode (license), companies rely on external partners to enter a foreign market Example: Nutella in Spain Ownership advantage -> good quality, good chocolate Location advantage -> no (countries are close, no tariffs, consumers' taste are similar) Entry mode -> export (entry mode that ensures more flexibility) Nutella in the US Ownership advantage -> yes Location advantage -> it's far, it's a big country, US consumers have different taste because they are used to peanut butter Internalization advantage -> it's risky to let a partner produce my products because you want to keep the recipe secret or the partner could not be able to maintain the same quality standard Entry mode -> FDI, internalization (foreign subsidiaries) McDonald no quality so entry mode franchising (to ensure control, but you need resources) Internalization vs collaborative mode: - Internalization: managing all the firm activities within theboundaries of the firm itself, within the firm itself, which means establishing individual facilities in each foreign market that are controlled directly by the company. The company should pay each subsidiary and hire staff. Collaborative mode: companies rely on external partners to enter foreign markets. Franchising: a company offers the possibility to use a particular business model to a number of entrepreneurs who are able to invest in this business model. In return, the company gains some royalties and long-term protection (patent only lasts 20 years). Choice between internalization and collaborative mode -> analysis of market imperfections. Market imperfections: a number of problems that prevent the firm from relying on external partners, that prevent writing an effective contract to protect your product abroad. The contractual agreements are not able to cover all the possibilities that we want to account for when we establish the boundaries of our collaboration. Example: Ferrero (Nutella) wants that thestandard level of quality is respected abroad, that the recipe remains secret -> cannot use a collaborative mode -> internalization (foreign subsidiaries) Patent protect your intellectual property for 20 years -> too short, because the product has a much larger life cycle, through patent you have to disclose the secrets of the production process McDonald: quality is not its competitive advantage so there is no need to establish its own facilities abroad to ensure and protect quality-> Select an entry mode that enables you more flexibility given the boundaries under which you operate The internationalization process: the Uppsala model There is a gradual process through which companies internationalize, they undertake an evolution starting from export (entry mode that has the lowest commitment of investment of resources in the foreign market) and finally reaches foreign direct investment because foreign markets are perceived as risky. Internationalization: the process by which a company

enters a foreign market

Not all international business id done by MNEs. Setting up a wholly owned subsidiary is usually the last stage of doing business abroad.

Internationalization process is gradual, incremental and it is a learning oriented process

Liability of foreignness: the inherent disadvantage foreign firms experience in host countries because of their non-native status, firms feels like outsider in a foreign market and lack of knowledge

• Differences in the rules of the game: institutions are unknown or uncertain (difficult to gain access to distributors, customers do not know your brand, language)
• Foreign firms are often discriminated against domestic firms
• Foreign firms have to deploy considerable resources and capabilities to engage the foreign market
• The liability of foreignness measures the cost of doing business abroad

Two important variables:

• market commitment: resources that a company devotes to a foreign market (how much money, Human Resources and investments are invested
in the foreign market), when a company perceives a market as risky it has a very low incentive in investing- market knowledge: companies perceive a market as risky because they lack of knowledgeLack of knowledge of market and of the internationalization process-> firms perceive a high risk of making a commitment to internationalization and thus they usually start with low commitment to foreign market (export)Firms are generally risk-adverse, firms incrementally increase their commitment to foreign markets by gradually acquiring knowledge about foreign markets ad foreign operations through experience (learning by doing)Learning oriented process -> after the first foreign market entry activity the company starts to accumulate knowledge and experience, the accumulation of knowledge will alleviate the perceived risk of the foreign market and companies will start to invest moreThe internationalization process is a path-dependent process (it depends on the process that the company is

Undergoing and on the experience that the company is having), the way firms accumulate knowledge about the foreign market from its past international experience helps direct the firm's future trajectory.

Psychic distance: the sum of factors preventing or disturbing the flows of information between firm and market: cultural variables, legal factors, and other social norms (language, education, business practices, culture, institutional framework, degree of industrial development etc). It is a synthetic concept of distance that accounts of all the barriers that a company perceive in entering a foreign market, it is personal and subjective, it depends on the specific experience.

It measures the extent to which a country is perceived as foreign, a foreign country's degree of foreignness. Closer psychic proximity makes it easier for firms to enter foreign markets. Firms conventionally prefer to engage with nearby countries first, because these are likely to be similar to their home country.

As they develop more confidence in internationalizing, they further expand in more remote countries.

Example: Lavazza -> the company started in 1970 its internationalization process, it started with indirect export (lowest amount of resources) in country that it perceived as closer (France, Germany), in 1980 they moved to direct export (development of sales subsidiaries, units of company established in the foreign country and they manage commercialization of products) and they started exporting in the US (relatively more distant), in 2010 it started to collaborate with an American company that manufactured coffee machines, finally it started with foreign direct investment, to acquire some foreign brands and companies

Calzedonia -> it started with export and at the end some franchising with countries that it considered similar (Spain and Portugal), it finally undertook an agreement with Limited Brands to gain access to the US markets and it decided to move production in other countries

more distantUppsala model applies well to European companies which are not big companies and havelimited resources (companies are resource-constrained)

Exceptions to the Uppsala model:

• Big step hypothesis: firms with access to a large pool of resources are less susceptible to theconsequences of bad commitment and they are able to sep up their internationalization effort ata faster rate (US companies, Chinese companies, state-owned Chinese companies enterforeign countries with direct acquisitions)
• Born-global companies: firms that are immediately or very quickly reliant on a foreignpresence to derive significant competitive advantage from the use of resources and the sale ofoutputs, often operating in the so-called global niches (small portions of one market that can befound in any specific country, small segments of consumers interested in one specific productlimited in one specific country but present in any country). Its market is global from thebeginning, brands developed in very
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