Teoria Emme

STRATEGIC INTERACTION THEORY



Usually we observe north/north FDIs. What does it mean? USA and EU trade

between each other because they are afraid that the each other may invest in

the mutual home country (USA in EUROPE and EU STATES IN USA, if they

do not find an agreement on staying in their own home country). Therefore,

the Paretian Optimum would be to collude and remain monopolist in each

own country.

Pm = Profit as monopolist

Pc = Profit as competitor

Company 1: bottom left + bottom right

Company 2: top right + bottom right

INTERNALIZATION THEORY:

It helps choosing whether it is better to outsource or to make a FDI. When a

firm approaches a market, it might face transaction markets imperfections,

which arise from:

Bounded rationality/Incomplete contracts

- We cannot have a clear scenario on the future due to partial

information. This can lead to sign incomplete contracts.

Asset specificity/Tacit knowledge

- When knowledge is a strong competitive advantage, it is difficult to

transfer it in a new market, due to the intangibility.

Information asymmetry

- It is the cause of opportunistic behaviours (“Moral hazard/Adverse

selection)

Specific investments

- Key for strong relationships. If the deal is broken, it may cause a great

loss.

Reputation effects

- If the reputation of the counterpart is not good, it is a great problem.

If I want to reduce these imperfections, I have to make researches and collect

information:

TIME REQUIRED INCREASES, EXPENDITURES INCREASE, EFFORTS

INCREASE

All these “costs”, summed to ones needed to monitor and control the

counterpart are called “transaction costs”; so, market imperfections give

birth to them.

The other options is to internalize transactions with a hierarchic organization

along the value chain (Vertical Integration). When it happens abroad, we have

FDIs and so MNCs.

MNCs is conceived as a mechanism that takes the place of the price system

in order to transfer tangible and intangible resources more efficiently, i.e.

without transaction costs. However, coordination costs might arise, especially

if I internalize at an international scale (costs to control and manage a MNCs).

OLI or ECLECTIC PARADIGM:

OLI is a puzzle, aimed at developing a systemic theory for MNCs. The

framework is built around the analysis of three set of advantages that explain

activities and operations of MNCs:

OWNERSHIP ADVANTAGE

- LOCALIZATION ADVANTAGE

- INTERNALISATION ADVANTAGE

-

4 different types of FDI are identified:

RESOURCE SEEKING

- Acquire resources of higher quality at lower costs

MARKET SEEKING

- Supply goods or services to other regions/markets

EFFICIENCY SEEKING

- Increase efficiency by leveraging economies of scale, scope, risk, and

diversification

ASSET SEEKING

- Acquire assets of foreign corporations to sustain/advance global

competitiveness

DYNAMICS THEORIES

3)

STAGE THEORY:

Previous theories were based on USA and UK firms; this one focuses on the

internalization of Swedish and smaller countries firms.

“Firms internationalize step by step: decisions about future investments

(modalities, countries and resources) depend on the path already followed by

the company, which adopts a linear and dynamic sequence of investments”.

The internationalization refer to two different patterns:

Increasing involvement in a single country:

- Exports via agents

a) Setting up of sales subsidiaries

b)

Setting up of production subsidiaries

c)

Involvement in a variety of countries:

- (From closer to more distant country)

EVOLUTIONARY APPROACH:

The firm is the generator of its ownership advantage, which arises from its

innovative activities and strategic behaviour:

By operating in many countries, MNCs acquire knowledge and use it to

evolve their ownership advantages. Specifically, knowledge is sourced both

from the internal network of subsidiaries (e.g. transfer of best practises) and

from the external network that subsidiaries establish with suppliers,

customers, partners etc.

What is the interaction between the ownership advantage and location

advantage? Firstly, this interaction is dynamic and cumulative; external

knowledge is included in the internal network, and internal knowledge is

transferred to the local context.

Knowledge is the main source of the ownership advantage. Internalization

does not depend on the market failures, but on the firm efficiency to transfer

and acquire knowledge. When a firm become efficient in transferring

knowledge, the company can move from internalization to externalization.

HOW MNEs ENTER FOREIGN MARKETS?

What are the basic entry decision when firms expand internationally?

Where should I enter? Which market?  The location

1) When should I enter? On what scale (gradually or not)?  The timing

2) and scale

How should I enter?  The entry mode

3)

There are many factors influencing these decisions, so there is not a best

way to enter. There are many different possibilities and each one has pros

and cons.

If a company decides to go abroad, to grow outside its country, it means that

the firm is evaluating this decision as profitable in the long run (there are risk

considered more attractive than others, or more profitable; we are interested

in maximizing profit!). After a firm

identifies which

market to enter

it must

determine the

timing of entry.

Entry is early

when the firm

enters before

other foreign

firms (no competitors, it can gain the highest market shares and build its

profitability as its first mover advantage).

Ex: Starbucks in China was first mover but had to work on Chinese people’s

customs based on tea, changing their attitude. Therefore, it also had to invest

a lot in advertising and marketing.

Entry is late when the firm enters when other foreign firms have already

established their presence in the host country. This kind of entry have some

advantages such as the minor possibility (compared to the early one) to make

mistakes in evaluating risks, new cultures and so on. Fast-follower firms can

learn from other firms’ errors and avoid great losses of money.

Scale of entry:

Firms that enter foreign markets on a large scale make a major strategic

commitment that changes the competitive playing field. Higher scale means

higher risks.

Small-scale entry can be attractive because it allows the firm to learn about a

foreign country, but at the same time, it limits the firm’s exposure to that

market.

Summarizing, there are no «right» decisions with foreign market entry, just

decisions that are associated with different levels of risk and rewards.

However, firms can learn (either from their own mistakes or from other firms)!

Learning:

Firms in developing countries can learn from competitors coming from

developed countries. Learning is central; observation of efficient companies

(their processes, operations…) can increase competitiveness.

What is the best way to enter a foreign market?

Entry options include exports, turnkey projects, licensing or franchising to

host country firms, JV with host country firms, or a wholly owned subsidiary in

the host country. The choice depends on:

Transport costs and trade barriers (related to products and countries)

- Political and economic risk (macro/microeconomics situation)

- Firm strategy

- A) EXPORTING

A)

First method firms use to enter a foreign market.

ATTRACTIVE WHEN: cheaper than setting a plant in a foreign country

(taking into consideration the product and country’s characteristics);

firms may exploit economies of scale.

NOT ATTRACTIVE WHEN: lower-cost manufacturing locations exist;

transport costs are high; tariff barriers are high; foreign agents fail to act

in the exporter’s best interest.

TURNKEY PROJECTS

B) They involve a contractor that agrees to handle every detail of a project

for a foreign client, including the training of the operating personnel. At

completion of the project, the foreign client is handed the key to a plant

that is ready for full operation.

ATTRACTIVE WHEN: allow firms to earn great economic returns from

the knowledge required to assemble and run a technological complex

process. They are less risky in countries where the political and the

economic environment would expose the firm to unacceptable high

economic and political risk. NOT ATTRACTIVE WHEN: the firm’s

process technology is a source of competitive advantage.

LICENSING

C) Arrangement where a licensor concede the rights to intangible property

(patents, inventions, formula, copyright and trademarks) to another

entity for a specified period and in return receives a royalty fee.

ATTRACTIVE WHEN: the firm does not have to bear the development

costs and risks associated with opening a foreign market; the firms

avoid barriers to investment; it allows a firm with intangible property that

may have business applications, but which does not want to develop

those applications itself, to capitalize on market opportunities. NOT

ATTRACTIVE WHEN: the firm does not have the tight control on

manufacturing, marketing and strategy necessary to realize experience

curve and location economies; there is the potential for loss of

proprietary (or intangible) technology or property.

FRANCHISING

D) A form of licensing (even if it is usually longer) in which the franchisor

sells intangible property and requires the franchisee agree to stand by

strict rules as to how it does business.

ADVANTAGES: It can avoid costs and risks of opening up a foreign

market. DISADVANTAGES: the geographic distance of the firm from its

foreign franchisees can make poor quality difficult to be detected.

JOINT VENTURES

E) The establishment of a firm that is jointly owned by two or more

otherwise independent firms. A typical JV is between two international

parties, incorporating a company, that subscribe to the shares in agreed

proportion, in cash, and start a new business.

ADVANTAGES: a firm can benefit from a local partner’s knowledge of

the host country’s competitive conditions, culture, language, political

systems, business systems; the costs and risks are shared with a

partner; they can help avoiding the risk of nationalization or other

adverse government interferences.

DISADVANTAGES: the firm risks giving control of its technology to the

partner; the firm many not have the tight control over the subsidiary

(unable to realize learning or location economies); shared ownership

can lead to conflicts and battles for control if goal and objectives differ

or change over time.

WHOLLY OWNED SUBSIDIARY

F) 100% ownership of a subsidiary that permits to set up a new operation

in the country (Greenfield investment) and acquire an established

firm.

ADVANTAGES: they reduce the risk