Lecture No: 03
Course Facilitator: Khurshid Alam Swati
University of Swat, Swat Email your query to:
Theories of internationalization
What do the following companies have in common?
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Definition of a MNC
• One of the most widely used definitions of the MNC today is “an enterprise that engages in foreign direct investments (FDIs) and owns or controls value-adding activities in more than one country”
• Underlying this view are two crucial parts, one pertaining to a (1) long-term investment of resources in other countries (FDIs) and the other to the (2) control of value-adding activities in foreign environments
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Theories of Internationalization
1. The Product Cycle Theory of Internationalization
2. The Opportunistic Growth Theory of International Expansion
3. Goshal and Bartlett’s Model of Innovation Processes in Multinationals
4. Theory of incremental internationalization
5. Eclectic paradigm - OLI paradigm
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1. The Product Cycle Theory of Internationalization
The theory was made by Raymond Vernon In early stage all raw materials and labor comes form country in which it was invented
Companies develop new products to be competitive in markets in developed economies
After adopting in international markets its production move to host country, In some cases product becomes an item that is imported by its original country of invention E.g. Microsoft manufacturing - Ireland Humacao, Puerto Rico, USA
Product is moved to less developed countries
Must have a core competency
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Figure 2.3: Product Life Cycle
Product life-cycle – Int’l Context
1. Introduction
2. Growth
3. Maturity
4. Saturation
5. Decline
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2. The Opportunistic Growth Theory of International Expansion
Opportunism is the conscious policy and practice of taking selfish advantage of circumstances – with little regard for principles, or with what the consequences are for others
Opportunist actions are expedient actions guided primarily by self-interested motives. The term can be applied to individual humans and living organisms, groups, organizations, styles, behaviors, and trends
“The harder I try, the luckier I get”
Goal is to improve a firm’s ability to respond successfully to opportunities
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3. Goshal and Bartlett’s Model of Innovation Processes in Multinationals
This theory focus on structure of organization
Four patterns of centralization and localization of innovation activities
Localization and internationalization
Centralization and decentralization
1. Center for Global operations – Centralized System
2. Local for Local operations – Decentralized System
3. Local for Global – Home Country
4. Global for Global
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Methods of internationalizing operations
Outsourcing – contracting with another company to carry out operations, usually more cheaply than the firm can do ‘in-house’. Includes:
Business process outsourcing (BPO)
Offshoring (contracting out of a function to a low-cost location)
FDI (Foreign Direct Investment) – ownership and control of foreign assets. Includes:
Acquisition of an existing business
Joint venture
Merging 10
Figure 2.4: Incremental internationalization
4. Theory of incremental internationalization
Subsidiary
A subsidiary is a company that is partly or completely owned by another company that holds a controlling interest in the subsidiary company
If a parent company owns a foreign subsidiary, the company under which the subsidiary is incorporated must follow the laws of the country where the subsidiary operates
The parent company still carries the foreign subsidiary's financials on its books (consolidated financial statements)
For the purposes of liability, taxation and regulation, subsidiaries are distinct legal entities.
Overseas Subsidiaries of NBP
National Bank of Pakistan" Kazakhstan, ( Kaskelen)
CJSC NBP Pakistan Subsidiary Bank in Tajikistan
Ufone (Pakistan Telecom Mobile Ltd) a wholly-owned subsidiary of PTCL
5. Eclectic paradigm - OLI paradigm
A theory that provides a three-tiered framework for a company to follow when determining if it is beneficial to pursue direct foreign investment
Deriving ideas or style from a broad and diverse range of sources
Paradigm - a typical example, pattern, or model of something
Mixture of ideas around the globe
Based on
1. O - Organization ownership advantages,
2. L - Location advantages and
3. I – Internalization - PTO 13
Figure 2.5: Dunning’s eclectic paradigm
OLI Model
MNE must have some strategic advantage which allows it to compete effectively with domestic firms
Must select countries for investment which have attractive sourcing and/or marketing environments
Must have managerial ability to coordinate operations located in foreign countries at a cost that is less than the benefit received from operating in these locations
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OLI Model
Firms pursuing international expansion must have some form of advantage in each of these factors to overcome the costs and disadvantages inherent in competing in int’l level and as a non-domestic company in a foreign market
Theoretical basis for the existence of MNEs
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Assignment No: 01
Regional Trading Blocs
Last date of Submission: 19th March 2014
QUIZ…..!!!
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