Lecture No: 03

Course Facilitator: Khurshid Alam Swati

University of Swat, Swat Email your query to:

Khurshidalamswati@yahoo.com

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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