TOPIC 1

-------------------------------------------------------------------------------------------------------------------
-

INTRODUCTION TO GLOBALIZATION AND INTERNATIONAL BUSINESS

The globalization of markets and production: types of globalization

Economic globalization: the increasing interconnectedness and interdependence of economies

around the world. It involves the integration of national economies into the global economy
through the flow of goods, services, capital, technology, information, and people across borders.
The effects of economic globalization can vary widely depending on the policies and
regulations in place in different countries.

It can lead to economic growth, increased efficiency, and access to a wider range of goods and
services. But, on the other hand, it can have potential negative consequences, such as inequality,
loss of cultural identity, and environmental degradation.

Market globalization: the process by which markets transition from being primarily national or
regional in nature to becoming more integrated on a global scale. This transformation is driven
by various factors, including advances in technology, trade liberalization, and changes in
consumer behaviour. Some examples of this process are IKEA, Coca-Cola, Starbucks Coffee,
Apple, ZARA…

It has its advantages, such as economic growth, innovation, and greater consumer options.
However, it also presents challenges related to competition, regulatory compliance, and
potential cultural clashes. How businesses and governments respond to these challenges can
significantly influence the outcomes of market globalization.

Globalization of manufacturing: phenomenon where the supply of goods and services is

distributed across various locations around the world. This approach to manufacturing has
become increasingly common due to factors such as advances in transportation, communication,
and trade liberalization.

It can lead to cost savings, increased product quality, and access to global markets. However, it
also involves complex supply chain management, potential political and economic stability risks
in different regions, and the need to adapt to varying regulatory environments. How a company
manages these factors can significantly impact its success in global manufacturing.

Global institutions: organizations created to address aspects of international cooperation,

economic development, trade, and governance, such as maintaining stability, promoting
economic development, and addressing global challenges. They play a crucial role in
administrating, regulating, overseeing, and promoting multinational treaties that control the
global business system.

There are multiple global institutions such as the World Trade Organization, the International
Monetary Fund, the World Bank, ONU, UNICEF or G-20.

The drivers of globalization:

Lucía Peñamaría Cancelo

The basic strengths that have pushed and intensified the process of economic globalization are
the reduction of barriers to commerce and investments and the role of technological change.

The barrier reduction can be seen in two aspects: international commerce and foreign direct
investment (FDI). Both are interconnected and contribute to economic development by
increasing trade, business opportunities, and cross-border investments.

1. International commerce, often simply referred to as international trade, involves the

exchange of goods and services between companies and consumers in one country and
those in another. The main barriers we can find in international commerce are tariffs,
import quotas, trade restrictions, customs regulations and technical standards. By
reducing them we can promote economic growth by expanding markets and increasing
the flow of goods and services between countries, which leads to increased consumer
choices and potentially lower prices.

2. FDI, also known as international direct investment (IED), refers to a company's

investment of resources, such as capital, technology, and expertise, in business activities
in a foreign country. It involves establishing or acquiring businesses, subsidiaries, or
assets abroad. The main barriers we can find in FDI are restrictions on foreign
ownership, government regulations, legal requirements, currency exchange controls,
and political instability in the host country. Reducing them can attract foreign capital
and expertise, create job opportunities, stimulate economic growth, and foster
technology and knowledge transfer from foreign investors to the host country. It can
also help diversify the host country's economy.

On the other hand, technological change plays a pivotal role in shaping the global economy and
influencing how organizations, especially global corporations, operate. Advances in
communication, information processes, and transportation have had a profound impact on the
way businesses function on a global scale. Examples of this can be microprocessors,
commercial aeroplanes, cargos or containers.

Technological change has profound implications for various aspects of globalization, including
the globalization of manufacturing and the globalization of markets.

In terms of globalization of manufacturing, technological advancements have allowed

companies to create dispersed and efficient value chains, where different stages of production
occur in various regions across the globe. This has several implications, like cost efficiency,
specialization and just-in-time manufacturing. Also, these advancements enabled companies to
better understand and respond to international customers' demands using market insights, e-
commerce and data personalization.

On the other hand, in terms of the globalization of markets, technological change has led to the
reduction of communication costs, which has several implications for the creation of global
electronic markets and for the convergence of tastes and preferences (global cultural exchange).

Lucía Peñamaría Cancelo

 TOPIC 2

-------------------------------------------------------------------------------------------------------------------
-

INTERNATIONAL TRADE AND FOREIGN DIRECT INVESTMENT

FDI:

Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce
and/or market in a foreign country. There are two forms of FDI:

- Greenfield investment: the establishment of a wholly new operation in a foreign country

- M&A: with an existing firm in the foreign country (majority / minority stake)

FDI in the world economy:

Foreign direct investment plays a crucial role in the global economy, and it can be analysed
through two primary perspectives:

- FDI Flows: These represent the amount of investment moving into or out of a country
within a specified time frame, typically a year. Inflows refer to foreign investments
coming into a country, while outflows denote domestic investments flowing out to
foreign countries.

- FDI Stock: This refers to the total accumulated value of foreign-owned assets,
including things like factories, equipment, land, and other assets, at a specific point in
time. It's a measure of the total investment made by foreign entities in a particular
country.

Historically, the United States has been a significant recipient of FDI (inflows), but there have
been changes in recent years. Developed countries have often been major sources of outflows of
FDI, contributing significantly to the FDI stock in various nations.

The increase in both stock and flows in recent years can be attributed to several factors:

 Concerns about protectionism: Firms often invest abroad to mitigate risks associated
with protectionist measures. FDI allows them to establish a presence in multiple
countries, reducing dependence on any single market.

 Shift towards democratic and free market economies: Countries moving toward
democratic political institutions and free market economies have attracted more FDI.
Stable political environments and open economic policies create favourable conditions
for foreign investment.

 Globalization: The globalization of the world economy has encouraged firms to expand
their operations globally. Establishing a presence in various regions ensures market
access and competitive advantages, leading to increased FDI.

The form of FDI: why do we prefer M&A?

Lucía Peñamaría Cancelo

FDI can take two forms: greenfield investments and mergers & acquisitions. Cross-border
investment often involves mergers and acquisitions (M&A) rather than greenfield investments,
which involve starting new operations from scratch in a foreign country, and there are several
reasons why acquisitions are attractive to companies engaging in international expansion.

Acquisitions typically take less time to complete compared to greenfield investments. Instead of
building new infrastructure, facilities, or establishing new operations, companies can acquire
existing assets and start operations more rapidly.

Acquiring established assets is often perceived as less risky compared to building from scratch.
Existing operations have a track record, established market presence, and a known customer
base, reducing uncertainty for the acquiring company.

Acquiring companies believe they can leverage their resources, expertise, technology, or
management skills to enhance the efficiency and profitability of the acquired business. This
could include introducing new technologies, improving processes, or accessing new markets
through the acquired company's existing network.

Examples like Philip Morris acquiring the Swiss food firm Jacob Suchard to secure a foothold
in the European food industry or Lenovo's acquisition of IBM's Personal Computing Division to
enter global markets illustrate how companies strategically use acquisitions to expand their
market presence, acquire technology or expertise, and increase their competitive advantage.

However, while acquisitions offer these advantages, they also come with challenges. Cultural
integration, management differences, regulatory hurdles, and overestimation of potential
synergies are among the complexities companies might face when integrating an acquired
entity. Hence, careful planning and execution are crucial to realizing the expected benefits from
such acquisitions.

Why do we prefer FDI rather than licensing or exporting?

Limitations of Exporting:

1. Transportation Costs: Exporting involves significant transportation costs, especially for

heavy or fragile goods, which may impact profitability.

2. Trade Barriers: Tariffs, quotas, and trade barriers imposed by foreign governments can
hinder market access and increase costs.

3. Limited Control: Companies have limited control over marketing, distribution, and
customer relationships compared to local competitors.

Examples: Companies like Cemex, multinational banks, and McDonald's initially faced
limitations in their exporting strategies due to transportation costs and trade barriers but later
expanded through FDI to establish a stronger presence in foreign markets.

Limitations of Licensing:

1. Loss of Control: Licensing may result in a loss of control over proprietary technologies,
brand image, and strategic decision-making in the foreign market.

2. Risk of Technological Leakage: Sharing proprietary technology through licensing can

risk intellectual property theft or compromise a company's competitive advantage.

Lucía Peñamaría Cancelo

 3. Incompatibility with Competitive Advantage: Not all competitive advantages are
amenable to licensing, especially if they rely heavily on specific know-how or trade
secrets.

Examples: Anheuser-Busch, Nike, and Disney have faced limitations in licensing due to
concerns about the protection of intellectual property and the lack of control over
manufacturing, marketing, and strategic decisions in foreign markets.

Theories about FDI:

Theories about Foreign Direct Investment (FDI) provide frameworks to understand and explain
the motivations, strategies, and determinants behind companies' decisions to invest in foreign
markets. Here are three prominent theories:

1. Monopolistic Advantage Theory (Hymers, 1976):

Hymers’s Monopolistic Advantage Theory suggests that Multinational Enterprises (MNEs)

favour FDI because it offers them control over resources, capabilities, and a level of market
power or monopoly compared to their foreign competitors. The advantage stems from exclusive
access to proprietary knowledge, patents, unique skills, and other assets that are not available to
their competitors in the foreign market. By possessing such unique advantages, companies can
effectively operate abroad and potentially gain a competitive edge over local competitors.

The theory implies that to succeed in foreign markets, companies need something distinctive or
exclusive, which provides them with a competitive edge and helps overcome the challenges
associated with operating in unfamiliar environments, known as the "liability of foreignness."

2. John Dunning’s eclectic paradigm (OLI):

Three factors must be considered when explaining both the rationale for and the direction of
foreign direct investment:

- Ownership Advantage (O): Companies possess unique ownership advantages such as

technology, brand recognition, or managerial skills that give them a competitive edge. FDI
occurs when firms aim to leverage these advantages in foreign markets.

- Location Advantage (L): Certain locations offer specific advantages like access to resources,
low-cost labour, or proximity to markets. Companies invest in these locations to benefit from
these advantages.

- Internalization Advantage (I): Firms might internalize their operations rather than relying on
external markets to benefit from their ownership advantages. They invest directly in foreign
markets to maintain better control over their unique assets.

3. Knickerbocker's theory of oligopolistic reaction to FDI:

Firms within the same industry tend to exhibit similar strategic behaviours and often engage in
foreign direct investment around the same time. This simultaneous FDI by multiple firms within
an industry indicates a pattern of interdependence and mutual influence.

Lucía Peñamaría Cancelo

The theory suggests a close relationship between FDI and rivalry in oligopolistic industries.
When one major player in an industry decides to undertake FDI in a particular foreign market, it
prompts other competitors to follow suit due to perceived competitive (Honda, Toyota, and
Nissan e.g.).

This theory can also be extended to embrace the concept of multipoint competition (companies
compete against each other in various markets or regions). When firms encounter each other in
different markets, their competition isn't limited to a single location but spreads across multiple
areas where they have operations or interests.

The theory suggests that competitive actions, such as FDI, are not solely influenced by market
conditions but are also influenced by the actions of competitors. Firms in an oligopolistic
industry closely monitor and react to each other's strategic moves, including foreign
investments, to maintain or improve their competitive positions.

4. Product Life Cycle Theory of FDI (Vernon, 1966):

This theory attempts to explain the internationalization of production by companies as they

move through different stages of a product's life cycle. It implies that firms engage in foreign
direct investment at specific stages in a product's life cycle to take advantage of various factors
such as market demand, cost efficiencies, and competitive pressures.

Companies initially innovate and develop new products in their home country. At this stage,
there's a high demand for the new product, and the company primarily focuses on local
production to cater to this demand.

As the product gains acceptance and demand grows, companies expand internationally. They
invest in advanced countries with similar consumer preferences and higher income levels. These
locations are chosen due to presence of a receptive market and favourable economic conditions.

When the product reaches maturity and competition intensifies, companies face pressures to
reduce costs. They begin shifting production to lower-cost developing countries to benefit from
cheaper labour, resources, and operational expenses. This allows companies to stay competitive
by offering lower-priced products.

Eventually, the product reaches a decline phase where demand decreases. At this point,
companies might reassess their investments and either discontinue production or consider other
strategies such as diversification or focusing on new innovations.

Host (receiving) country benefits and costs:

 Benefits to the host country:

Resource transfer effect: FDI often brings capital, technology, managerial expertise, and
knowledge transfer, enhancing the host country's productive capacity and competitiveness.

Employment effect: FDI creates job opportunities directly through new investments and
indirectly through the supply chain, contributing to economic growth and reducing
unemployment rates.

Balance of payments effect: FDI can lead to increased exports, reduced reliance on imports, and
a favourable impact on the balance of payments by contributing to foreign exchange earnings.

Lucía Peñamaría Cancelo

Competition and economic growth: FDI can stimulate competition, encourage innovation, and
lead to advancements in R&D, fostering economic growth in the host country.

 Costs or challenges to the host country:

Adverse effects on competition: FDI might lead to concentration in markets due to M&A,
reducing competition. It can also lead to unfair market practices such as dumping.

Adverse effects on balance of payments: Profits and earnings repatriation by foreign investors
might negatively impact the host country's balance of payments. Increased imports of raw
materials or resources for production can also affect the trade balance.

Loss of national sovereignty: In some cases, heavy reliance on foreign investment might result
in a loss of control or influence over critical sectors, impacting a nation's autonomy.

Environmental and social impact: Sometimes, FDI might bring environmental challenges or
social disruptions, especially if environmental standards or labour laws are not adequately
enforced.

Home (source) country benefits and costs:

 Benefits to the home country:

Capital account effects: Inward flow of foreign earnings from overseas subsidiaries positively
impacts the home country's capital account in the balance of payments, potentially boosting the
country's economic standing.

Employment effects: Outward FDI can generate employment opportunities in the home country,
albeit indirectly. The expansion of a company's operations abroad might necessitate hiring more
employees at headquarters or in other areas of the business that support the int operations.

Learning and skills transfer: Companies engaged in outward FDI can gain valuable skills,
knowledge, and expertise from foreign markets. These insights and capabilities can be brought
back to the home country, contributing to increased competitiveness and innovation.

 Costs or challenges to the home country:

Capital outflow: There is an initial capital outflow required to finance the establishment of
foreign operations, impacting the home country's balance of payments in the short term.

Current account impact: If the purpose of outward FDI is to serve the home market from a low-
cost production location abroad, it can negatively affect the current account, and if outward FDI
substitutes for direct exports, the current account might suffer due to reduced export earnings.

Employment effects: Outward FDI may raise concerns about job exports from the home
country. If jobs are moved to lower-cost locations abroad, there could be worries about potential
unemployment or job displacement in the home country.

FDI country policies:

Government policies to promote or control the flow of investments across borders, aiming to
balance economic growth, safeguard interests, and ensure a fair investment environment.

Lucía Peñamaría Cancelo

  Home Country Policies:

Encouraging outward FDI: Insurance programs to mitigate risks associated with foreign
investments, special funds and financing schemes to support companies venturing into foreign
markets and elimination of double taxation on the same income earned abroad and at home.
Also, governments can influence outward FDI by relaxing restrictions on inbound FDI.

Restricting outward FDI: Governments might impose exchange controls or regulations to limit
the amount of capital leaving the country for overseas investments, implementing tax
regulations that discourage companies from moving their operations or profits offshore and
restricting outward FDI due to national interest or concerns about potential economic risks
associated with excessive foreign investments.

 Host Country Policies:

Encouraging inward FDI: Offering various incentives like tax breaks, low-interest loans,
subsidies, or other favourable terms to attract foreign investors.

Restricting inward FDI: Imposing restrictions or regulations that exclude foreign firms from
certain sectors or industries to protect domestic interests or strategic sectors and requiring
foreign investors to meet specific criteria or conditions (e.g., local employment, technology
transfer) to maximize benefits for the host country.

Political ideology and FDI:

Ideology toward FDI has ranged from a radical stance that is hostile to all FDI to the non-
interventionist principle of free market economies.

1. The radical view - the MNE is an instrument of imperialist domination and a tool for
exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.

2. The free market view - international production should be distributed among countries
according to the theory of comparative advantage.

3. The pragmatic nationalist view - FDI has both benefits, such as inflows of capital,
technology, skills and jobs, and costs, such as repatriation of profits to the home country and a
negative balance of payments effect.

Lucía Peñamaría Cancelo

 TOPIC 5

-------------------------------------------------------------------------------------------------------------------
-

ENTRY INTO FOREIGN MARKETS:

Why do firms go global?

Firms go global because of 4 reasons: to expand the market for their domestic product offerings
by selling them in international markets; to realize location economies dispersing value creation
activities to locations where can be performed most efficiently; to realize cost economies from
experience effects by serving an expanded global market from a central location; and to earn a
greater return by leveraging valuable skills developed in foreign operations and transferring
them to other entities within the firm’s global network of operations.

When expanding, firms must take some entry decisions: which markets to enter (location
choice), when to enter them (timing of entry) and on what scale (scale of entry) and how to
enter them (the choice of entry mode). There are no “right” decisions with foreign market entry,
just decisions that are associated with different levels of risk and reward.

Location choice:

Firms need to assess the long run profit potential of each market to select the one that suits
them.

The most favourable markets are politically stable developed and developing nations with free
market systems, low inflation, and low private sector debt, and the less desirable markets are
politically unstable developing nations with mixed or command economies, or developing
nations where speculative financial bubbles have led to excess borrowing.

Successful firms usually offer products that have not been widely available in the market and
that satisfy an unmet need.

In order to select the location for your internationalization there’s a filtering procedure
companies use, that is composed by 5 aspects to take into account:

1. Market potential (initial screening): involves evaluating the market size, growth potential,
demand for products or services, consumer behaviour, and trends in the target country.

2. Economic and financial conditions (second screening): GDP growth, inflation rates, currency
stability, tax policies, labour costs, infrastructure, availability of financing, and overall
economic stability.

3. Political and legal factors (third screening): political stability, government policies, legal
frameworks, regulatory environment, trade agreements, intellectual property protection, and
ease of doing business.

4. Socio-cultural factors (fourth screening): Understanding the cultural nuances, social norms,
consumer preferences, language barriers, education levels, demographics, and societal values.

Lucía Peñamaría Cancelo

5. Competitive environment (fifth screening): Analysing the competitive landscape, including
the presence of competitors, market saturation/trends, entry barriers, and potential for
differentiation.

The sequential country assessment approach offers several advantages when companies are
evaluating potential locations for international expansion or foreign direct investment (FDI).

By assessing countries sequentially, companies can identify and account for the minimum or
maximum values of specific criteria that are crucial for their business. This focused approach
allows them to pinpoint countries that meet or exceed essential thresholds on critical factors.

Unlike averaging methods, sequential assessment avoids the issue of diluting the impact of
extreme values or outliers. This means that standout or exceptional factors in a country (either
positive or negative) are not diluted by averaging, allowing companies to make more accurate
assessments.

Companies can assign relative importance to different criteria based on their specific objectives
and needs. Moreover, they can set threshold levels for each criterion according to their strategic
goals, allowing for a more customized evaluation process.

On the other hand, the overall usefulness of country assessment models lies in their ability to
provide a general framework for selecting markets or locations.

Country assessment model offer a starting point for evaluating potential locations. They provide
a structured approach to consider various factors, aiding in initial decision-making processes.

While these models offer a structured framework, market selection requires more detailed and
comprehensive analyses beyond the broad strokes provided by the models. They serve as a
foundation but should be followed up with deeper, more nuanced assessments.

There's a risk of using data from these models to justify or reinforce preconceived biases or
stereotypes about certain countries. It's essential to critically evaluate data sources and avoid
relying solely on assumptions.

Country characteristics are just one element influencing overseas expansion. Other crucial
factors such as market demand, competition, regulatory environment, cultural nuances, and
strategic fit with business goals also significantly impact the success of international ventures.

Timing of entry:

After a firm identifies which market to enter, it must determine the timing of entry.

There are two types of entry: early and late. An entry is considered early when an international
business enters a foreign market before other foreign firms. An entry is considered late when a
firm enters after other international businesses have already established themselves in the
market.

Firms entering a market early can gain first mover advantages including the ability to pre-empt
rivals and capture demand by establishing a strong brand name, the ability to build up sales
volume in that country and ride down the experience curve ahead of rivals and gain a cost
advantage over later entrants and the ability to create switching costs that tie customers into
their products or services making it difficult for later entrants to win business.

Lucía Peñamaría Cancelo

But there are also disadvantages associated with entering a foreign market before other
international businesses. These may result in pioneering costs (costs that an early entrant has to
bear that a later entrant can avoid) such as the costs of business failure if the firm, due to its
ignorance of the foreign environment, makes some major mistakes or the costs of promoting
and establishing a product offering, including the cost of educating the customers.

Scale of entry:

Entering foreign markets on a significant scale involves substantial strategic commitments that
can alter the competitive landscape for a company. This commitment often necessitates
considerable investments, resources, and planning which can have a long-term impact and are
difficult to reverse.

When a firm decides to enter a foreign market extensively, it's usually with the intention of
establishing a significant presence, gaining market share, and achieving long-term objectives.

Small-scale entry can be attractive because it allows the firm to learn about a foreign market,
but at the same time it limits the firm’s exposure to that market

Entry modes:

Firms can enter foreign market through exporting, turnkey projects, licensing, franchising, joint
ventures, wholly owned subsidiaries and strategic alliances.

Exporting: Selling goods or services produced in one country to another. It's typically the
simplest form of international business activity and can involve direct or indirect exporting
through intermediaries.

Turnkey projects: Involves the construction or development of facilities in a foreign market by a

firm. Once completed, the project is turned over to the foreign buyer, and the firm transfers the
knowledge and technology needed to operate the facility.

Licensing: Allowing a foreign company to use intellectual property (such as patents,

trademarks, or technology) in exchange for fees or royalties. The licensee pays for the rights to
use the intellectual property without the licensor needing to be directly involved in production
or operations.

Franchising: Similar to licensing, but more comprehensive. In a franchise agreement, the

franchisor provides a complete business model, including branding, processes, and support, to
the franchisee in exchange for ongoing fees or royalties.

Joint ventures: Partnerships formed between a local firm in the foreign market and a foreign
company. Both parties contribute resources and share ownership, risks, and control in a venture.

Wholly owned subsidiaries: Establishing a new business or acquiring an existing one in a

foreign market, allowing the parent company full control over operations, resources, and profits.
This method provides the highest degree of control but involves substantial investment and
commitment.

Strategic alliances: Collaborative agreements between two or more firms aiming to achieve
mutual benefits. These alliances can be for a specific project, product development, or for
accessing new markets and sharing resources.

Lucía Peñamaría Cancelo

The strategy of international business

The strategy is the actions that managers take to attain the goals of the firm. They typically
focus on profitability (ROI  add value, reduce costs and raise prices) and profit growth (%
increase in net profits over time  sell more in existing markets and enter new markets).

There are three basic competitive strategies when creating value: differentiation, which means
the creation of a unique product or service and low cost, which offers similar products but at a
lower costs (it tends to lower the quality of the product or service in order to do so) and a hybrid
strategy. Selecting the core strategy is crucial to understand the strategic positioning the
company should follow, and this way be able to maximize profitability.

The most important aspect is to pick a position on the efficiency frontier (between low cost and
differentiation) and check that there’s enough demand to support that choice. Selecting a
competitive advantage means that the strategy, operations and organization of the company
should be consistent with each other to achieve superior profitability.

To attain superior performance and earn a high ROI a firm’s strategy must make sense given the
market conditions: the operations of the firm must support the firm’s strategy, the organizational
architecture of the firm must also match operations and strategy, and if market conditions shift,
the firm’s strategy, operations, and organization have to adapt.

There are two types of competitive pressures that place conflicting demands on the firm: cost
reduction and local responsiveness.

Cost reduction:

Pressures for cost reductions are greatest. This is the case in industries producing commodity
type products that fill universal needs (consumers taste and preferences are similar across
countries), when major competitors are based in low cost locations, where there is persistent
excess capacity and where consumers are powerful and face low switching costs. In order to
respond to these pressures, firms need to lower the costs of value creation.

Local responsiveness:

Pressures for local responsiveness arise from differences in consumer tastes and preferences,
differences in traditional practices and infrastructure, differences in distribution channels and
host government demands. Firms facing these pressures need to differentiate their products and
marketing strategy in each country.

-------------------------------------------------------------------------------------------------------------------

Lucía Peñamaría Cancelo

Depending on the level of pressure of each one of the pressures explained, the company will
choose to follow different strategies: global standardization strategy, transnational strategy,
international strategy and localization strategy.

Global standardization strategy:

Firms that pursue a global standardization strategy focus on increasing profitability and profit
growth by reaping the cost reductions that come from economies of scale, learning effects, and
location economies. Their strategic goal is to pursue a low-cost strategy on a global scale. This
strategy makes sense when there are strong pressures for cost reductions and demands for local
responsiveness are minimal.

Transnational strategy:

Firms pursuing a transnational strategy are trying to simultaneously achieve low costs,
differentiate product offerings across markets to account for local differences; and foster a
multidirectional flow of skills between different subsidiaries in the firm’s global network of
operations. A transnational strategy makes sense when cost pressures are intense, and
simultaneously, so are pressures for local responsiveness.

Localization strategy:

A localization strategy focuses on increasing profitability by customizing the firm’s goods or

services so that they provide a good match to tastes and preferences in different national
markets. Localization is most appropriate when there are substantial differences across nations
with regard to consumer tastes and preferences, and where cost pressures are not too intense.

International strategy:

When there are low cost pressures and low pressures for local responsiveness, an international
strategy is appropriate. An international strategy involves taking products first produced for the
domestic market and then selling them internationally with only minimal local customization.

Core resources and capabilities (corporate strategies):

When considering growth directions or paths in corporate strategies, companies often explore
various approaches to expand and enhance their core resources and capabilities

Internationalization: (always the case of the companies we study)

Definition: Internationalization involves expanding business operations beyond domestic

borders to target foreign markets. This growth strategy can include exporting goods,
establishing subsidiaries or joint ventures abroad, or setting up production facilities in different
countries.

Purpose: It aims to tap into new markets, gain access to a wider customer base, diversify
revenue streams, benefit from economies of scale, and potentially reduce costs or risks
associated with dependence on a single market.

Vertical Integration (Value Chain):

Lucía Peñamaría Cancelo

Definition: Vertical integration involves owning or controlling different stages of the value
chain within an industry. It can be either backward integration (controlling suppliers or raw
materials) or forward integration (controlling distribution or sales channels).

Purpose: By integrating different stages of the value chain, companies aim to improve
efficiency, reduce costs, have better control over quality, ensure a steady supply of inputs or
resources, and capture more value from their products or services.

Diversification:

Definition: Diversification refers to expanding a company's business activities into new markets
or industries that are unrelated or tangentially related to its current offerings. It can be
categorized into related diversification (into industries that share similarities with the existing
business) or unrelated diversification (venturing into entirely different industries).

Purpose: Diversification can mitigate risks associated with dependence on a single market or
product, capitalize on new opportunities, and leverage existing capabilities to enter new
markets. It aims to create a portfolio of businesses that can perform well under different market
conditions.

Companies often consider these growth paths based on their existing capabilities, resources,
market opportunities, risk tolerance, and strategic goals. Sometimes, a combination of these
strategies might be employed to achieve growth objectives. Additionally, the effectiveness of
each strategy depends on the industry dynamics, competitive landscape, and the company's
ability to execute and manage the complexities associated with each growth direction.

Lucía Peñamaría Cancelo

 TOPIC 6

-------------------------------------------------------------------------------------------------------------------
-

THE ORGANIZATION OF INTERNATIONAL BUSINESS:

To attain superior performance and earn a high return on capital, a firm’s strategy must make
sense given market conditions, and its structure must align with their strategy.

Early organization structures:

When a company first begins international operations, it is typical for these activities to be
extensions of domestic operations, and the primary focus continues to be the local market. But
as international operations increase the MNE will take steps to address this structurally. For
instance, by having an export department to handle international sales or by using an overseas
subsidiary.

Overseas subsidiary in an early stage of internationalization have to report directly to the CEO,
but in more advanced stages, they can do so through and international division. Foreign
subsidiaries depend on an international division. This facilitates communication between the
headquarter and the foreign subsidiary and improves coordination of entry alternatives, but
limits the communication between the international division and domestic operations.

International Division provides experience and valuable knowledge to the foreign subsidiary,
which can increase its profitability by using that knowledge. The international division is less
autonomous than domestic ones, it depends on the cooperation and help of these domestic
divisions (this can seem unfair to the domestic divisions).

Global structures:

As MNEs generate more and more revenues from their overseas operations, their strategies and
the structures used to implement these strategies become more global in focus.

Global structures by product  global standardization strategy in diversified companies (+

lines)

This structure is an extension of the domestic product divisions, and it has the reduction of costs
as its main goal. Each product line can manage its international operations, and the managers of
the subsidiaries communicate with the managers of the divisions they belong to («profit
centre»).

Lucía Peñamaría Cancelo

The main advantages of this structures are: Improve cost efficiency, improve communication
and transfer of resources between domestic and international divisions and facilitate the
adaptation to the clients' specific needs of each product line.

The main disadvantages are duplication of staff and activities (functions), the difficulty in
coordinating activities of all divisions and sharing resources and information and the need of
managers that know the products global demand.

Global structures by area  localization strategy

The managers of each division are responsible for all products and business in a particular
geographic area This structure facilitates communication between subsidiaries and division
managers, in relation with products and strategic decisions of each area, which facilitates the
firm adaptation to local tastes and regulations but also means a greater sensibility to local
conditions. It is necessary to have cultural distant markets and complex operations in each area.

The downsides of this structure are the duplicity of functions, since each division has it own
functional departments, and the MNE cannot full advantage of synergies because it is difficult
coordinating geographically dispersed divisions.

Global structure by function  global standardization strategy in non-diversified companies

It involves structuring the company's departments based on specific functions or areas of

expertise. This approach allows for centralization of power at the CEO level while extending the
operations internationally as an extension of domestic operations (depend on each different
area).

Global structures (matrix divided by product)  transnational strategy in diversified companies

“ (matrix divided by functional area)  transnational strategy in non-diversified companies

It combines different dimensions trying to respond to new firm strategic needs using a dual
reporting line (balance between centralization, local responsiveness and building of functional
competencies). The authority by areas or products (two bosses at the same level) allows the firm
a better adaptation to local needs, and at the same time the functional part of the matrix
improves the coordination of technical responsibilities. Also, they have a greater flexibility in
terms of resources.

But there are some problems as consequence of the complex design and dual line of authority:
avoidance of responsibilities, conflicts and misunderstandings, excessive pressure from the
manager who receives orders from two bosses and the huge need of meetings, repots and delays
in the decision-making process.

Global structures (mix)  two pressure but one of them is more important (hybrid companies)

Strategic role of international HRM: Comparison of staffing approaches

Lucía Peñamaría Cancelo

Global value chains: Should an international business make the component parts to go into their
final product or outsource them?

Make-or-buy decisions (decisions about whether to perform a certain value creation activity in-
house or outsource it to another firm) are important to a firm’s manufacturing strategy.
Nowadays uncertainty and external shocks also define this decision

Key aspects for understanding structures:

Non-diversified companies  only one business line

Diversified companies  more than one business line

Product importance  cost reduction strategy

Location importance  local responsiveness

External environment analysis:

PESTEL analysis: politics, economic, social, technological, environmental and legal aspects

CAGE analysis: cultural, administrative, geographic and economic differences (uni and
bilateral)

Possible exam questions:

- Identify growth paths (corporate strategies)

- Competitive strategies and explain them

- Entry modes, suitability and alternative ones for a company

- Internationalization strategies (we can argue more than one)

- Organizational structure and if it’s the right one and how would you change it if it’s not

- Analyse outsourcing decisions of the company

- External environment influencing the internationalization of a company

- Most important pressures and relation with competitive strategy

- Best FDI theories to explain the internationalization of a company

Lucía Peñamaría Cancelo

Lucía Peñamaría Cancelo