Summary Theories of International Business
Table of contents
Theme 1: Core IB theories......................................................................................................................3
The global value chain smiling curve..................................................................................................3
The cage framework...........................................................................................................................3
Liability of foreignness (LOF)..............................................................................................................4
Definition multinational enterprise (MNE).........................................................................................4
Definition foreign direct investment (FDI)..........................................................................................4
Firm specific advantage (FSA).............................................................................................................5
Vertical integration.............................................................................................................................5
Vertical integration versus outsourcing..............................................................................................6
Entry mode choice..............................................................................................................................6
Internalization theory.........................................................................................................................6
Eclectic/OLI paradigm.........................................................................................................................7
Uppsala model....................................................................................................................................7
Resource based view of IB..................................................................................................................8
Institutional based view of IB.............................................................................................................8
Institutional framework......................................................................................................................8
Theme 2: Global integration process......................................................................................................9
Basics for international communication.............................................................................................9
4 views of the ‘big picture’ on globalization.....................................................................................10
Economic dimensions of globalization..............................................................................................10
Trends driving globalizations............................................................................................................10
Backlashes of globalization...............................................................................................................10
Is globalization positive or negative?................................................................................................11
Semi globalization.............................................................................................................................11
MNEs’ regional and global strategies...............................................................................................11
Theme 3: MNE entry modes.................................................................................................................12
Motives of MNEs going abroad........................................................................................................12
Entry mode choice............................................................................................................................13
Export...............................................................................................................................................13
Contractual agreement.....................................................................................................................14
Wholly Owned Subsidiaries (WOS)...................................................................................................14
Entry mode choice based on ‘Gradual involvements in foreign markets’.........................................15
Entry mode choice based on transaction costs................................................................................15
, Entry mode choice based on location specific factors......................................................................15
Theme 4: Home and host countries and concepts of distance.............................................................16
Cage framework...............................................................................................................................16
4 dimensions of distance..................................................................................................................16
Traditional country portfolio analysis (CPA).....................................................................................19
How to reduce LoF?..........................................................................................................................19
What is distance?.............................................................................................................................19
Geographic distance.........................................................................................................................19
Institutional distance........................................................................................................................19
Economic distance............................................................................................................................20
Cultural distance...............................................................................................................................21
Cultural distance: Hofstede..............................................................................................................21
The globe project..............................................................................................................................21
The assumption of spatial homogeneity...........................................................................................22
Home country influences the (double) diamond model...................................................................22
Single diamond analysis....................................................................................................................23
Role of the government....................................................................................................................24
Double diamond analysis (DDA), institutional integration processes...............................................24
Korean and Singapore double diamond example.............................................................................25
Theme 5: New MNEs............................................................................................................................26
New MNEs vs. Traditioal MNEs.........................................................................................................26
International new ventures and born globals...................................................................................26
Can we apply traditional MNE theories to INVs?..............................................................................27
Characteristics of INVs......................................................................................................................27
4 elements for sustainable INVs (Oviatt & McDougall, 2005)...........................................................28
Emerging Markets MNEs (EMMNEs)................................................................................................28
Typologies of Emerging Economies..................................................................................................29
Cluster analysis of Mid-Range EEs (Emerging Economies)................................................................29
What is an EM MNE & how do they internationalize? (Luo & Tung, 2007)......................................30
EM MNEs & Inward FDI (Luo & Tung, 2007).....................................................................................30
Internationalization of EM MNEs......................................................................................................30
International springboard: motives..................................................................................................31
Unique challenges of EM MNEs (Luo & Tung, 2007, Ramamurti, 2012)...........................................31
Do we need new theories for EM MNEs?.........................................................................................31
Why EM MNEs?................................................................................................................................32
EM MNEs Internationalization Patterns............................................................................................32
,Theme 1: Core IB theories
Traditionally, International Business (IB) is defined as a business (or firm) that engages in
international (cross border) economic activities (Peng, 2012).
International Business versus International Management:
IM is about managing complexity and uncertainty Cross border activity brings new
challenges. It requires awareness and strategic thinking and is implying interdisciplinary
approaches and an open mindset.
IB is more complex than business in a single country Border effects include for example
currency and political risks, institutional and cultural differences, and country variations in
terms of social values, ethics and expectations.
A summary of the evolution over the years:
Period 1: 1980s: industry-based view of Porter.
Period 2: 1990s: resource-based view of Barney.
Period 3: 2000s: institution-based view.
The global value chain smiling curve
The cage framework
Distance may originate from differences along four dimensions:
1. Cultural A country’s cultural attributes determine how people interact with one another
and with companies and institutions. It may include language, religion, ethic/racial identity,
shared history and norms, etc.
2. Administrative/ institutional Encompasses differences in the regulatory, normative, and
cognitive pillars of institutions.
3. Geographic
4. Economic
, Liability of foreignness (LOF)
Liability of foreignness (LOF) is a key concept of IB important to remember!
- MNEs have a disadvantage to local competitors in a host country.
This is considered one of the costs of doing business abroad.
- LOF is the fundamental assumption driving theories of MNEs
(internalization theory, OLI paradigm, Uppsala model).
- Disadvantages to operating in a foreign market can be caused by:
o Spatial distance, which induces travel, transportation and
coordination costs.
o Unfamiliarity with the host country, involving adaption and
learning costs.
o A lack of legitimacy caused by (economic) nationalism from
local stakeholders. Actually, this is discrimination. For
example, the government or business decision makers in a
specific firm discriminate you and select a home country firm
for a job.
o Home-country restrictions on host-country activities. An
example of this is the haring, which is not allowed to be
exported to Russia.
Definition multinational enterprise (MNE)
An MNE is a firm that owns and/or controls value creating activities in two or more different
countries. It is a firm that uses FDI to establish or purchase income generating assets abroad but may
also trade goods and services across international borders (i.e. coca cola, IBM, Sony, Philips, Canon,
Unilever). It requires two things:
1. A parent company This is an incorporated or unincorporated enterprise, or group of
enterprises, which has a direct investment enterprise operating in a country other than that
of the parent.
2. Subsidiaries An incorporated enterprise in the host country in which another entity
directly owns more than half of the shareholder’s voting power. (MINI is for example a
subsidiary of BMW).
Definition foreign direct investment (FDI)
Foreign Direct Investment is an investment made to acquire lasting interest in enterprises operating
outside of the economy of the investors.
The investors’ purpose is to gain an effective voice in the management of the enterprise. The
percentage of equity ownership is considered an effective voice in the management of an
enterprise (referred to as the degree of control.
An FDI is an investment in which a single foreign investor:
Either owns 10% or more of the ordinary shares or voting power or,
Owns less than 10%, yet still maintains an effective voice in management (e.g. specific
control rights or golden shares. Golden share is the share which makes a decision fall the
other way. It is important for strategic positioning. Imagine two parties both have 49%
percent shares, the 50th percent is the one that makes the decision: the golden share. 10
percent in the US is not the same as 10 percent in India. This differs per country.
FDI differs from foreign portfolio investment as it aims at gaining control over a (foreign) enterprise.
Table of contents
Theme 1: Core IB theories......................................................................................................................3
The global value chain smiling curve..................................................................................................3
The cage framework...........................................................................................................................3
Liability of foreignness (LOF)..............................................................................................................4
Definition multinational enterprise (MNE).........................................................................................4
Definition foreign direct investment (FDI)..........................................................................................4
Firm specific advantage (FSA).............................................................................................................5
Vertical integration.............................................................................................................................5
Vertical integration versus outsourcing..............................................................................................6
Entry mode choice..............................................................................................................................6
Internalization theory.........................................................................................................................6
Eclectic/OLI paradigm.........................................................................................................................7
Uppsala model....................................................................................................................................7
Resource based view of IB..................................................................................................................8
Institutional based view of IB.............................................................................................................8
Institutional framework......................................................................................................................8
Theme 2: Global integration process......................................................................................................9
Basics for international communication.............................................................................................9
4 views of the ‘big picture’ on globalization.....................................................................................10
Economic dimensions of globalization..............................................................................................10
Trends driving globalizations............................................................................................................10
Backlashes of globalization...............................................................................................................10
Is globalization positive or negative?................................................................................................11
Semi globalization.............................................................................................................................11
MNEs’ regional and global strategies...............................................................................................11
Theme 3: MNE entry modes.................................................................................................................12
Motives of MNEs going abroad........................................................................................................12
Entry mode choice............................................................................................................................13
Export...............................................................................................................................................13
Contractual agreement.....................................................................................................................14
Wholly Owned Subsidiaries (WOS)...................................................................................................14
Entry mode choice based on ‘Gradual involvements in foreign markets’.........................................15
Entry mode choice based on transaction costs................................................................................15
, Entry mode choice based on location specific factors......................................................................15
Theme 4: Home and host countries and concepts of distance.............................................................16
Cage framework...............................................................................................................................16
4 dimensions of distance..................................................................................................................16
Traditional country portfolio analysis (CPA).....................................................................................19
How to reduce LoF?..........................................................................................................................19
What is distance?.............................................................................................................................19
Geographic distance.........................................................................................................................19
Institutional distance........................................................................................................................19
Economic distance............................................................................................................................20
Cultural distance...............................................................................................................................21
Cultural distance: Hofstede..............................................................................................................21
The globe project..............................................................................................................................21
The assumption of spatial homogeneity...........................................................................................22
Home country influences the (double) diamond model...................................................................22
Single diamond analysis....................................................................................................................23
Role of the government....................................................................................................................24
Double diamond analysis (DDA), institutional integration processes...............................................24
Korean and Singapore double diamond example.............................................................................25
Theme 5: New MNEs............................................................................................................................26
New MNEs vs. Traditioal MNEs.........................................................................................................26
International new ventures and born globals...................................................................................26
Can we apply traditional MNE theories to INVs?..............................................................................27
Characteristics of INVs......................................................................................................................27
4 elements for sustainable INVs (Oviatt & McDougall, 2005)...........................................................28
Emerging Markets MNEs (EMMNEs)................................................................................................28
Typologies of Emerging Economies..................................................................................................29
Cluster analysis of Mid-Range EEs (Emerging Economies)................................................................29
What is an EM MNE & how do they internationalize? (Luo & Tung, 2007)......................................30
EM MNEs & Inward FDI (Luo & Tung, 2007).....................................................................................30
Internationalization of EM MNEs......................................................................................................30
International springboard: motives..................................................................................................31
Unique challenges of EM MNEs (Luo & Tung, 2007, Ramamurti, 2012)...........................................31
Do we need new theories for EM MNEs?.........................................................................................31
Why EM MNEs?................................................................................................................................32
EM MNEs Internationalization Patterns............................................................................................32
,Theme 1: Core IB theories
Traditionally, International Business (IB) is defined as a business (or firm) that engages in
international (cross border) economic activities (Peng, 2012).
International Business versus International Management:
IM is about managing complexity and uncertainty Cross border activity brings new
challenges. It requires awareness and strategic thinking and is implying interdisciplinary
approaches and an open mindset.
IB is more complex than business in a single country Border effects include for example
currency and political risks, institutional and cultural differences, and country variations in
terms of social values, ethics and expectations.
A summary of the evolution over the years:
Period 1: 1980s: industry-based view of Porter.
Period 2: 1990s: resource-based view of Barney.
Period 3: 2000s: institution-based view.
The global value chain smiling curve
The cage framework
Distance may originate from differences along four dimensions:
1. Cultural A country’s cultural attributes determine how people interact with one another
and with companies and institutions. It may include language, religion, ethic/racial identity,
shared history and norms, etc.
2. Administrative/ institutional Encompasses differences in the regulatory, normative, and
cognitive pillars of institutions.
3. Geographic
4. Economic
, Liability of foreignness (LOF)
Liability of foreignness (LOF) is a key concept of IB important to remember!
- MNEs have a disadvantage to local competitors in a host country.
This is considered one of the costs of doing business abroad.
- LOF is the fundamental assumption driving theories of MNEs
(internalization theory, OLI paradigm, Uppsala model).
- Disadvantages to operating in a foreign market can be caused by:
o Spatial distance, which induces travel, transportation and
coordination costs.
o Unfamiliarity with the host country, involving adaption and
learning costs.
o A lack of legitimacy caused by (economic) nationalism from
local stakeholders. Actually, this is discrimination. For
example, the government or business decision makers in a
specific firm discriminate you and select a home country firm
for a job.
o Home-country restrictions on host-country activities. An
example of this is the haring, which is not allowed to be
exported to Russia.
Definition multinational enterprise (MNE)
An MNE is a firm that owns and/or controls value creating activities in two or more different
countries. It is a firm that uses FDI to establish or purchase income generating assets abroad but may
also trade goods and services across international borders (i.e. coca cola, IBM, Sony, Philips, Canon,
Unilever). It requires two things:
1. A parent company This is an incorporated or unincorporated enterprise, or group of
enterprises, which has a direct investment enterprise operating in a country other than that
of the parent.
2. Subsidiaries An incorporated enterprise in the host country in which another entity
directly owns more than half of the shareholder’s voting power. (MINI is for example a
subsidiary of BMW).
Definition foreign direct investment (FDI)
Foreign Direct Investment is an investment made to acquire lasting interest in enterprises operating
outside of the economy of the investors.
The investors’ purpose is to gain an effective voice in the management of the enterprise. The
percentage of equity ownership is considered an effective voice in the management of an
enterprise (referred to as the degree of control.
An FDI is an investment in which a single foreign investor:
Either owns 10% or more of the ordinary shares or voting power or,
Owns less than 10%, yet still maintains an effective voice in management (e.g. specific
control rights or golden shares. Golden share is the share which makes a decision fall the
other way. It is important for strategic positioning. Imagine two parties both have 49%
percent shares, the 50th percent is the one that makes the decision: the golden share. 10
percent in the US is not the same as 10 percent in India. This differs per country.
FDI differs from foreign portfolio investment as it aims at gaining control over a (foreign) enterprise.
