Week 1
Why do firms enter foreign markets
Market seeking: Grow revenues (get a share of large fast-growing markets)
Efficiency seeking: Improve efficiency (cheaper manpower or material)
Strategic asset seeking: Acquire knowledge based resources (e.g. scientific and managerial
talent)
Resource seeking: Acquire natural resources
OLI theory of internationalization
When do firms invest in setting foreign operations?
OLI =
Ownership (O) advantages
Firm-specific assets
● Technology
● Brands
Location (L) advantages
Host country advantages
● Markets
● Resources
● Government policies
Internalization (I) Advantages
Why internalize?
● Higher control
● Lower costs
Home country location advantages
But where do multinationals get their ownership advantages from?
● The best automobile firms come from; Germany, Japan, Now Korea
● Most big-tech and AI firms come from the US
● Most global fast-food chains come from the US
● The best EV companies come from China
● Largest IT services companies come from India
How do firms benefit from home country location?
1
,Porter’s Diamond Model
Any company’s ability to compete internationally is based on interrelated set of location
advantages that certain industries in different nations possess
- These location advantages include:
Factor conditions = These are different types of resources that may or may not be present in
the home country.
1. Basic factors
→ e.g. Natural resources → Resource mobility is low.
2. Advanced factors
→ e.g. Human resources or research capabilities —> Need to be highly specialized to
an industry’s particular needs
Demand conditions = Nations gain competitive advantages in industries where the home
demand gives their companies a clearer or earlier picture of emerging buyer needs.
A nations’ companies can anticipate global trends if the nation's values are spreading.
E.g.:
● The international success of the U.S fast food industry reflects not only US desire for
convenience but the spread of these tastes to the rest of the world.
● US music genres such as Hip-hop
Nations export values and taste through:
1. Media
2. Training foreigners
3. Political influence
4. Foreign activities of their citizens and companies
Related and supporting industries
● Industrial production does not take place in isolation but relies on suppliers, component
manufacturers, distributors, etc.
2
, ● Presence of related and supporting industries builds the foundations on which the focal
industry can excel.
Firm strategy, structure and rivalry
National circumstances and context create strong tendencies in how companies are managed
within competitive industries.
Domestic rivalry is instrumental to international competitiveness
It forces companies to innovate and develop unique and sustainable strengths and capabilities.
→ e.g. intense rivalry within the japanese automobile industry
Government and chance
Governments can play a role by:
● Stimulation early demand
● Building infrastructure
● Provinding education systems
● Promoting domestic rivalry
Change can have positive or negative impacts like:
● War
● Natural disasters
In short: Porter's diamond model explains why one country is more successful than another for
particular industries.
Theory of competitive advantage
When the firm can create more value than its rivals, and when this firm’s rivals cannot replicate
the source of value that the firm creates
Something that allows me to + my profits
Something that allows me to - my costs
We want to consider two questions:
a. How does the firm create a competitive advantage?
b. How does the firm sustain a competitive advantage?
Creating a competitive advantage
There are Three theoretical views which jointly explain a firm’s competitive advantage (or lack of
it):
1. Industry-based view
2. Resource-based view
3. Institution based view
3
, 1.Industry-based view
Industry-based view: suggests that the firm must position itself against these five external,
environmental forces. And competitive advantage comes from the firm’s ability to structure itself
to face this.
Porter (1980,1985) drew on insights from economists in industrial organization, who point to the
importance of industry when explaining firm performance
Economists described markets in terms of:
- Market structures: (perfectly) competitive, oligopolistic, monopolistic, etc
- Barriers to entry - start up investment costs - and exit - costs of disposing assets etc.
→ Porter linked all of this to firm-level strategy
Porters 5 terms of market forces:
1. The threat of entry
- What is the threat that new entrants appear in the market?
- Start-ups are one threat, diversifications are another
2. The threat of rivalry
- How competitive is the industry?
- How intensive is the competition in our industry?
- Are we a monopolist, or one of many?
- Are there exit barriers?
3. The threat of substitutes
- Can competitors substitute our product?
- How is the substitute priced?
- Is our offering unique, or not
4. The threat of powerful suppliers
- Are your supply sources concentrated or diversified
- Are you integrated upstream
5. The threat of powerful buyers
- Where is the power?
- Are there few customers or many?
- Do the customers also buy from your rivals?
2.Resource-based view
The Resource-Based View: Focuses on the internal resources of the organization in
considering the source of competitive advantage.
● RBV suggests that it is unique clusters of resources that determine profitability.
● Performance differences are explained by looking inside the organization.
What are resources?
Amit & Schoemaker (1993): Resources and capabilities
Resources: What the firm has. They are firm specific but tradable
● Factors that are owned or controlled by the firm
4
Why do firms enter foreign markets
Market seeking: Grow revenues (get a share of large fast-growing markets)
Efficiency seeking: Improve efficiency (cheaper manpower or material)
Strategic asset seeking: Acquire knowledge based resources (e.g. scientific and managerial
talent)
Resource seeking: Acquire natural resources
OLI theory of internationalization
When do firms invest in setting foreign operations?
OLI =
Ownership (O) advantages
Firm-specific assets
● Technology
● Brands
Location (L) advantages
Host country advantages
● Markets
● Resources
● Government policies
Internalization (I) Advantages
Why internalize?
● Higher control
● Lower costs
Home country location advantages
But where do multinationals get their ownership advantages from?
● The best automobile firms come from; Germany, Japan, Now Korea
● Most big-tech and AI firms come from the US
● Most global fast-food chains come from the US
● The best EV companies come from China
● Largest IT services companies come from India
How do firms benefit from home country location?
1
,Porter’s Diamond Model
Any company’s ability to compete internationally is based on interrelated set of location
advantages that certain industries in different nations possess
- These location advantages include:
Factor conditions = These are different types of resources that may or may not be present in
the home country.
1. Basic factors
→ e.g. Natural resources → Resource mobility is low.
2. Advanced factors
→ e.g. Human resources or research capabilities —> Need to be highly specialized to
an industry’s particular needs
Demand conditions = Nations gain competitive advantages in industries where the home
demand gives their companies a clearer or earlier picture of emerging buyer needs.
A nations’ companies can anticipate global trends if the nation's values are spreading.
E.g.:
● The international success of the U.S fast food industry reflects not only US desire for
convenience but the spread of these tastes to the rest of the world.
● US music genres such as Hip-hop
Nations export values and taste through:
1. Media
2. Training foreigners
3. Political influence
4. Foreign activities of their citizens and companies
Related and supporting industries
● Industrial production does not take place in isolation but relies on suppliers, component
manufacturers, distributors, etc.
2
, ● Presence of related and supporting industries builds the foundations on which the focal
industry can excel.
Firm strategy, structure and rivalry
National circumstances and context create strong tendencies in how companies are managed
within competitive industries.
Domestic rivalry is instrumental to international competitiveness
It forces companies to innovate and develop unique and sustainable strengths and capabilities.
→ e.g. intense rivalry within the japanese automobile industry
Government and chance
Governments can play a role by:
● Stimulation early demand
● Building infrastructure
● Provinding education systems
● Promoting domestic rivalry
Change can have positive or negative impacts like:
● War
● Natural disasters
In short: Porter's diamond model explains why one country is more successful than another for
particular industries.
Theory of competitive advantage
When the firm can create more value than its rivals, and when this firm’s rivals cannot replicate
the source of value that the firm creates
Something that allows me to + my profits
Something that allows me to - my costs
We want to consider two questions:
a. How does the firm create a competitive advantage?
b. How does the firm sustain a competitive advantage?
Creating a competitive advantage
There are Three theoretical views which jointly explain a firm’s competitive advantage (or lack of
it):
1. Industry-based view
2. Resource-based view
3. Institution based view
3
, 1.Industry-based view
Industry-based view: suggests that the firm must position itself against these five external,
environmental forces. And competitive advantage comes from the firm’s ability to structure itself
to face this.
Porter (1980,1985) drew on insights from economists in industrial organization, who point to the
importance of industry when explaining firm performance
Economists described markets in terms of:
- Market structures: (perfectly) competitive, oligopolistic, monopolistic, etc
- Barriers to entry - start up investment costs - and exit - costs of disposing assets etc.
→ Porter linked all of this to firm-level strategy
Porters 5 terms of market forces:
1. The threat of entry
- What is the threat that new entrants appear in the market?
- Start-ups are one threat, diversifications are another
2. The threat of rivalry
- How competitive is the industry?
- How intensive is the competition in our industry?
- Are we a monopolist, or one of many?
- Are there exit barriers?
3. The threat of substitutes
- Can competitors substitute our product?
- How is the substitute priced?
- Is our offering unique, or not
4. The threat of powerful suppliers
- Are your supply sources concentrated or diversified
- Are you integrated upstream
5. The threat of powerful buyers
- Where is the power?
- Are there few customers or many?
- Do the customers also buy from your rivals?
2.Resource-based view
The Resource-Based View: Focuses on the internal resources of the organization in
considering the source of competitive advantage.
● RBV suggests that it is unique clusters of resources that determine profitability.
● Performance differences are explained by looking inside the organization.
What are resources?
Amit & Schoemaker (1993): Resources and capabilities
Resources: What the firm has. They are firm specific but tradable
● Factors that are owned or controlled by the firm
4
