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INTRODUCTION International business strategy: effectively and
efficiently matching an MNEs internal strength (relative to
competitors) with the opportunities and challenges found in
geographically dispersed environments that cross international
borders. The seven concepts of the unifying framework (brief
overview)
1. Internationally transferable (or non-location-bound) firm-
specific advantage (FSAs) a. Tacit know-how (difficult to transfer)
b. Explicit knowledge (easy to transfer)
i. Blueprints, docs, memos 2. Non-transferable (or
location-bound) FSAs
a. Marks & Spencers: first in its chain to open. Advantage:
prime real estate Transfer to Canada transfer the advantage?
No.
b. Best Practice: TOYOTA Supplier networks c. Reputation based
(Thumbs up vs coca cola) Switch watch
3. Location advantages a. Silicon valley
i. Huge pool of qualified engineers (Stanford closeby)/Clusters
Complimentary skills
4. Investment in and value through recombination a. Constitutes
the heart of int business strategy: The highest-order FSA is
the
ability, not just to combine reliably the MNEs existing
resources, but to recombine its resources in novel ways, usually
including newly accessed resources where in a limited geographic
space or internationally
5. Complementary resources of external actors (not shown
explicitly in figure) a. Additional resources, provided by external
actors bt accessible to the MNE,
which may be necessary to fill resource gaps and achieve success
in the marketplace
6. Bounded rationality a. We dont have the mental capacity to
put together all
the information and evaluate it. b. You have preference and you
try to maximize those
preferences c. Utilarian theory: based on price
7. Bounded reliability a. There is inconsistency between what
you expect and
what actually happens. There are limits to the extent to which
you can rely on someone.
Resource base (expressed in managerial terms) Constitutes of
various components either owned by or accessible to the firm
1. Physical resources, including natural resources, buildings,
plant equipment, etc 2. Financial resources, including access to
equity and loan comp 3. Human resources, including both individuals
and teams. These individuals and
teams have both entrepreneurial and operational (or
efficiency-related) skills 4. Upstream knowledge, including
sourcing knowledge, as well as product- and
process-related technological knowledge
Reflects the distinct resource base available to the firm,
critic to achieving success in the marketplace
Reflect the behavioural characteristics (of both senior MNE
managers and another relevant economic actors) that may impede
international success
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5. Downstream knowledge, critical to the interface with
customers, and related to marketing, sales, distribution and
after-sales service activities
6. Administrative (governance-related) knowledge regarding the
functioning of the organizational structure, organizational culture
and organizational systems
7. Reputational resources, including brand names, a good
reputation for honest business dealings, etc.
A firm can have FSA in each of the above resource areas. The
nature, level and contestability of these strengths vis--vis rivals
should, in principle be identifiable through a properly conducted
benchmarking exercise. INSERT FIGURE 1
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PART 1: CORE CONCEPTS Chapter 1: Conceptual foundations of
international business strategy 1. Internationally transferable FSA
and the four MNE archetypes The MNE creates value and satisfies
stakeholder needs by operating across national borders. When
crossing the MNE is, almost by definition, at a disadvantage as
compared to firms form the host country, because these firms
possess a knowledge basis that is appropriately matched to local
stakeholder requirements.
- The MNE incurs additional costs of doing business abroad,
resulting form cultural economic, institutional and spatial
distance between home and host country environments.
- To overcome this, the MNE must have proprietary internal
strengths, such as technological, marketing or administrative
(governance-related knowledge).
- This set of strengths is called the non-location bound FSAs o
These FSAs do not stop creating value when the border is crossed
between
home and host country. o This can also be a embodied in a final
product. I.e. when the MNE exports
gods and services that are valued highly by host country
customers Intermeidiate products (quality control) Exploitations of
FSAs abroad can also be done by external actors
(such as licensees), or by network partners (such as joint
venture partners or distributors)
The paradox of an internationally transferable FSA is the
following: If the FSA consists of easily codifiable knowledge
(explicit knowledge such as blueprint), then it can be cheaply
transferred and effectively deployed and exploited abroad, but it
can be easily imitated by other firms. (Cost of FSA transfer
relatively but potential value also relatively , namely if
competitors can easily imitate what the MNE is best at) IN CONTRAST
MNEs face great difficulty transferring tacit knowledge (because
this cannot fully be replicated through simple communication
channels, it requires person-to-person communication and is
necessarily associated with sending human resources abroad,
building up experience over time, learning by doing etc.) Example:
most important bundle of tacit knowledge is contained in the MNEs
administrative heritage: key routines developed by the firm since
its inception THERE ARE 4 MNE Archetypes of administrative
heritage
1. Centralized exporter (market seeker) a. This
home-country-managed firm builds upon a tradition of selling
product
internationally, out of a limited number of (scale-efficient)
facilites in the home country and with only minor, usually
customer-oriented, value creating activities abroad
b. Standardized products manufactured at home embody the firms
FSAs (themselves developed on the basis of a favourable home
country environment, including local clustering) and make the
exporting firm successful in international markets.
c. Foreign subsidiaries act largely as facilitators of efficient
home country production
i. Economies of scale ii. Standardize products and sell it in
the host country.
2. International projector (cloning home operations)
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a. The firm builds upon a tradition of transferring its
proprietary knowledge developed in the home country to foreign
subsidiaries, which are essentially clones of the home
operations
b. Knowledge-based FSAs developed in the home country are
transferred to subsidiaries in host countries. The international
projector MNE seeks international expansion by projecting its home
country success recipes abroad.
3. International coordinator (coordinate location advantages in
host countries) a. The international coordinator builds upon a
tradition of managing
international operations, both upstream and downstream, through
a tightly controlled but still flexible logistics function
b. International operations are specialized in specific
value-added activities and form vertical value chains across
borders. The MNEs key FSAs are in efficiently linking these
geographically dispersed operations through seamless logistics.
i. MANY LARGE MNES IN NATURAL RESOURCES INDUSTRIES FIT THIS
ARCHETYPE ii. You transfer your assets and clone them (Disney
Land)
4. Multi-centred MNE (building on host countrys location FSAs)
a. The multi-centred MNE consists of a set of entrepreneurial
subsidiaries
abroad, which are key to knowledge-based FSA development.
National responsiveness is the foundation of the international
strategy. The non-location-bound FSAs that hold theses firms
together are minimal: common financial governance and the identity
and specific business interests of the founders or main owners
(typically entrepreneurial families or investors)
i. Multicentred MNE should be viewed as a portfolio of largely
independent businesses. Many older European MNEs fit this mould
(unlike Japanese MNEs)
b. Youre present in different countries. But youre taking a
different set and recombining it with the local aspect in the host
country.
Although there are 4 archetypes that describe the bulk, there
are other types. However, the commonality among all these types is
the transfer of at least some FSAs across borders
- I.e .not included in the 4 are freestanding compnies
(companies that were set up abroad mainly by British and Dutch
investors.
o Public policy and institutional convergence greatly reduced
the additional costs of doing business abroad, and provided home
country entrepreneurs with more direct access to the location
advantages of the host countries involved.
- Emerging Economy MNEs (EMNEs). These firms do not derive their
strenths primarily from advanced technology, brand names or a a
sophisteicated logistics apparatus, rather on building on their own
resources. Their early stages include;
o Entrepreneurial quality of management o Management
capabilities in effective strategy execution o Learned
technologies, resulting from a role as licensee or
subcontractor
for technology rich MNEs from developed economies. o Learned
knowledge from early alliance formation with other MNEs
whereby the EMNE may have provided strength in government
relations or access to local resources to the alliance.
o Privileged access to home country resources
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o Cost innovations/operational excellence, sometimes as the
result of functioning in adverse environment circumstances and
ill-functioning external markets
o Ability to adapt technology/products to emerging economy needs
2. Non-location bound FSAs (4 main types)
1. Stand-alone resources linked to location advantages, such as
a network of privileged retail locations leading to a dominant
market share in the home market (as often found in retail banking),
are immobile and therefore inherently non-transferable.
2. Other resources such as local marketing knowledge and
reputational knowledge and reputational resources, may not have the
same value across borders
3. Local best practices: may not be considered as such abroad by
a variety of stakeholders and might even be deemed illegal (i.e.
routines/systems/buyer-supplier relations)
4. Even the firms domestic recombination capability may not be
adept enough to confront the additional complexities of foreign.
This may lead to a dominant market share and superior expansion
rate in the home country, as the firm engaged in product
diversification or innovation, and thereby its geographic market
coverage domestically.
3. Location advantages Represent the entire set of strengths
characterizing a specific location, and useable by firms operating
in that location. There strengths should always be assessed
relative to the useable strengths of other locations - I.e. a
superior educational system another location advantage will support
firms that build upon sophisticated human resource skills - Or home
country advantages (natural resources) Why would an MNE want to
engage in FDI in a host country?
- FDI: the allocation of resource bundles (combinations of
physical, financial, human knowledge and reputational resources) by
an MNE in a host country, with the purpose of performing business
activities over which the MNE retains strategic control in that
country
- Answer: MNE should engage in FDI only if the host country
confers a location advantage relative to the home country; several
motivations
o 1. Natural resource seeking: entails the search for physical
financial or human resources in host countries
o 2. Market seeking: reflects the search for customers in host
countries Host country loc. advantage: the presence of customers
willing
and able to purchase the firms product (NOT THE SAME AS
EXPORTING)
o 2. Strategic resource seeking: the desire to gain access to
advanced resources in the sphere of upstream knowledge downstream
knowledge, administrative knowledge or reputational resources
o 4. Efficiency seeking: the desire to capitalize on
environmental changes that make specific locations in the MNEs
international network of operations more attractive than before for
the consilidation or concentration of specific activities
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4. Value creating through recombination The firm is able to grow
by innovating and diversifying. This means combining in novel ways
existing resources, often in conjunction with newly accessed
resources. (Aim is finding new profitable ways to use
resources)
- Resource combination require 3 things: o 1. Entrepreneurial
skills (managers + employees) to face new productive
opportunities. o 2. Slack or unused productive resources, beyond
those needed for the
efficient functioning of current operations o 3. The willingness
and capacity to let go of some resources embedded in
extant FSAs, and to replace these by resources with higher value
creating potential in host enviroms.
o Continuous innovation and effective exploitation of innovation
is required to stay ahead of the competition
MNEs highest order FSA ; - The MNEs recombination capability
leads to processes and products that embody integrated bundles of
knowledge, meaning melded bundles of old and newly accessed
knowledge - The firm cannot only transfer abroad its existing set
of FSAs, but also create new knowledge, integrate it with the
existing knowledge base and exploit the resulting, new knowledge
bundles across geographic space in ways that satisfy stakeholder
needs Patterns figure: (MAKE TABLE WITH THE FIGURES) Pattern 1: I
Pattern 2: Pattern 3: Pattern 4: Pattern 5: Pattern 6: Pattern 7:
Pattern 8: Pattern 9: Pattern 10: 5. Complementary resources of
external actors Some success ingredients may be missing and these
can be provided by external factors
- International development of the required strengths is
expected to bring a lower net value than relying upon external
factors
- The need to rely on external can be satisfied in practice, and
does not jeopardize the specific expansion project considered.
6. Bounded rationality Reflects scarcity of mind; meaning that
the managers responsible for making decisions and engaging in
purposive action in the firm always face information problems
1. Access to information sufficient in quality and quantity to
guide decision making and managerial action
a. Any information about the environment relevant to the MNEs
functioning and performance, especially about the future state of
the environment, is
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necessarily partial and incomplete, giving the complexity and
uncertainty characterizing the environment and its evolution.
2. Limited capability to process complex information bundles a.
Problems of processing information, especially in determining
its
relevance to the firm and its implications for strategy.
Example: Commonly encountered by senior managers of MNEs, is the
phenomenon that senior managers in the home country and senior
managers in the host country may adopt difffent decision-making
approaches. They may select different information as relevant to
strategy, given the multifacetedness of the relevant information
(variety of types of accessible information) 6. Bounded reliability
Imperfect effort towards pre-specified goal achievement, thereby
leading to incomplete fulfilment of promises
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Chapter 2: The critical role of firm-specific advantages Two
perspectives
- Prahalad & Hamel, 1990 (P&H) o Senior managers should
view their firm as a portfolio of corporate
competencies which are its high-order FSAs (i.e. shared
knowledge). o According to P&H, core competencies, meaning the
firms routines and
recombination capabilities, produce components called core
products, which are put together to create end products.
- Bartmess & Cerny (B&C) o Explains the implications of
a core-competencies approach when the MNE
expands internationally There are 3 characteristics to help
managers identify core competencies (A core competence should)
1. Be difficult for competitors to imitate in terms of achieving
the required internal coordination and learning
a. Which points to the distinctiveness of the firms routines and
recombination abilities
2. Provide potential access to a wide variety of markets a.
Which points to the capabilitys contribution towards combining
or
recombining resources for success in new environments 3. Make a
significant contribution to the perceived customer benefits of the
end
product a. Which points to satisfying the needs of customers, a
key stakeholder group
In addition to these 3 there is a 4th characteristic (implicitly
assumed by P&H)
4. The loss of a core competence would have an important
negative effect on the firms present and future performance
a. In terms of value creation and satisfying stakeholder
objectives Furthermore, there is the issue of acquiring FSAs
through external strategic alliances rather than through internal,
organic development.
- So, the firm intends to internalize the knowledge and skills
of the alliance partner(s)
o Thus furthering the creation of the companys own technological
and process-related FSA
o B&C argue that manufacturing knowledge in fact, any type
of knowledge embedded in a single functional area such as R&D
or marketing is not a core competence in and of itself. Core
competencies involve the combo of stand-alone-knowledge
bundles found in different functions into routines, as well as
the further recombination of existing resource bundles with new
resources
Successful? Entire set should be transferred abroad -
Outsourcing strategies for key components, as a shortcut to
increased short-term
profitability, may lead to the loss of FSAs
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Assuming a given volume of information that must be exchanged
between two distinct activities, these 5 criteria together
determine the scope of the bounded rationality problem that must be
solved;
1. Complexity a. Higher complexity requires, geographic
proximity to be effective and
efficient 2. Required level of interaction
a. Lower predictability of info+need for two-way info requires
geo proximity 3. Similarity of background and expertise
a. Less similarity, more difficult to communicate from a
distance 4. Requirement of a prior relationship
a. Sensitive communication between related activities req. prior
relationship 5. Concreteness of information
a. Does not simply refer to tacitness of ino in technical sense.
But also the info beyond its verbal content (emotions, feelings and
cultural values may be embedded in the information transmitted)
Chapter 3: The nature of home country location advantages
Porter, 1990 (The competitive advantage of nations)
- Any companys ability to compete in the international arena is
based mainly on an interrelated set of location advantage
- A high level of pressure in its home base pushes the firm to
innovate and to upgrade systematically, resulting in FSA
creation.
o These FSAs are instrumental to expansion in foreign markets o
A nations competitiveness depends on the capacity of its industry
to
innovate and upgrade. - Companies gain advantage against the
worlds best competitors
o Because of pressure and challenge. They benefit from having
strong domestic rivals, aggressive home-based suppliers, and
demanding local customers
- Porters diamond consists of: o Factor conditions:
Factors of production in the home base such as natural resources
& More importantly: created factors conditions such as
skilled
labour, scientific knowledge & infrastructure o Demand
conditions:
Focus on domestic market size & domestic buyer
sophistication o Related and supporting industries:
High-quality internationally competitive home-based suppliers
Companies related industries are critical to the firms
international
competitiveness o Firm strategy, industry structure and
rivalry:
Highly competitive, home-based industry with efficient
macro-level governance and several domestic rivals may help the
firm in that industry become internationally competitive
Porter focuses primarily on the rise of industries at the
national level, and less on firm-specific challenges. As a result
his provides relatively little practical guidance
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to the managers or owners of newly established firms, in terms
of what location advantages can or should mean to them. Chapter 4:
The problem with host country location advantages Pankaj Ghemawat
(2001) HBR: Distance still matters: the hard reality of global
expansion. Here he explains that although technology makes the
world smaller, it does not elimate the cost of distance.
Demonstrates that firms often overestimate the attractiveness of
foreign markets while neglecting risks arising from DISTANCE.
Distance (CAGE):
1. Cultural distance: a. Results from difference in national
cultural attributes such as language,
religious beliefs, social norms and race i. I.e. Star TV
underestimating the markets preference for locally
produced, Chinese language content 2. Administrative (or
institutional) distance
a. Reflects differences in societal institutions. This distance
can be low (or lowered) if two or more countries share a common
history (including colonial relations), have political ties, have
engaged in efforts towards economics and monetary integration or
preferential trading arrangements, and synchronize government
policies.
i. I.e. in order to protect domestic industries, host countries
raise barriers through trade tariffs, quotas, restrictions on
foreign-owned companies and preferential treatment of domestic
firms
3. Geographic (or spatial) distance a. Represents the physical
distance between countries, taking into account
the ease of transport between the countries. Having a common
border or easy access via river and ocean waterways may keep this
distance low. Differences in topographic or climate my make this
distance higher. Human intervention, such as the creation of
efficient transportation and communication links, can reduce this
distance.
i. More than physical proximity! It encompasses other aspects
affecting the separation of countries in space (and therefore in
time), including man-made elements such as transportation costs,
communication infrastructure.
ii. Ghemawat: products with low value-to-weight ratios (such as
steel and cement) and highly perishable items incur the greatest
cost increases as transportation distances increase (CEMEX)
4. Economic distance a. Represents differences in consumer
wealth, income level and distribution,
infrastructure characteristics, the cost and quality of natural,
financial and human resources, and prevailing business
practices.
i. Two broad approaches 1. Replicating existing competitive
advantages, building upon
scale and scope of economies 2. Exploiting differences in input
costs or prices between
markets through economic arbitrage
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Ghemawats methodology is based on a thorough analysis of
economic data concerning international trade. He regressed trade
between every possible pair of countries in the world in each of 70
industries on each dimension of distance. Each distance component
comounds the bounded rationality problem faced by the MNEs senior
management: the problem of uncertainty increases, as does the
problem of imperfect processing of information Theory: Ghemawat
demonstrates that the extent of globalization has been vastly
exaggerated. The dot com boom was supposed to signal the end of
distance. A truly global marketplace would materialize thanks to
information technology, with unlimited potential for firms to
expand in foreign markets etc. With this article Ghemawats
dismisses the blief that distance has finally been conquered and
that the CAGE distances are here to stay.
1. Vestring, Rouse & Reinert wrote a complementary
perspective with the message that MNEs intending to be cost leaders
in their industry should establish portfolios in low-cost countries
to which selected activities can be outsourced. They observed that
many cost leaders in industries ranging from automotive and
chemicals to consumer products and technology do not simply
outsource to a few high-profile low-cost destinations (i.e. China
& India) but attempt to reduce risk by including a broader set
of countries in their offshoring strategy. They do caution against
undisciplined fragmentation of offshoring activities
o They focus on the benefits of accessing multiple,
high-distance input markets Whereas Ghemawat focuses on the risk of
penetrating too many of
high-distance output markets. For Ghemawat distance is
fundamentally a barrier; for Vestring et al it is fundamentally an
opportunity (i.e. a large MNE would be insufficiently diversified
if it outsourced only to China, labor cost might be low, but it has
more political uncertainty
o They argue that large MNEs should develop a particular
recombination capability: an FSA in offshoring. In practical terms,
that means that strategic offsoring decisions are
not left to individual business units, but are handled in a
centralized fashion to create cost advantages across business units
by pooling resources, jointly developing new suppliers or expanding
economies of scale in low-cost countries.
o The authors implicitly take on Ghemawats suggestions: that
they must be well informed on all relevant cost categories and
other relevant country characteristics
2. Schmidt & Pan complementary perspective focuses on the
cultural distance components and provides guidance to Western MNEs
selling branded consumer products (e.g. soft, drinks,
entertainment, health care etc) when penetrating the high-distance
Asian markets.
a. Attention must be devoted to selecting the right corporate
and product brand names
i. i.e. in Asia do the strokes, characters have the same meaning
as you want them to have
b. Attention must be devoted to creating the right image.
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i. Here the corporate image is often more important than the
image created for an individual product. This contrasts with the
US, where the corporate brand name may mean little to consumers in
terms of the value they attribute to it, divorced from a particular
product.
c. Asian perceptions are affected by the collectivist nature of
Asian society meaning inter alia that specific reference groups may
be critical in persuading customers to purchase a product, and that
comparative advertising, including criticism of other firms, is
inappropriate.
i. Schmitt & Pans implicit message is that senior management
must either pay sufficient attention to these shopping lists of
distance components or else follow Ghemawats perception and avoid
such high-distance markets altogether.
Chapter 5: Combining firm-specific advantages and location
advantages in a multinational network Bartlett & Ghoshall
(1986) How MNEs should manage their subsidiary network. They
suggest that (1) many MNEs mistakenly view host country
subsidiaries simply as recipients and distributors of company
knowledge and products. These MNEs do not recognize the MNEs
potential to develop unique bundles which in turn can make the
corporate HQ isolated and oblivious to changing conditions in key
international markets. (2) The HQ hierarchy syndrome; senior
management views the organizations as consisting of two distinct
levels;
- Dominant o Corporate HQ control key decision-making process
and overall company
resources in order to implement a consistent global strategy -
Subordinate
o National subsidiaries, merely act as implementers and adapters
of the global strategy in their localities.
These two simplifying strategies homogenization and
centralization cause tensions between headquarters and
subsidiaries, as corporate HQ attempt to maintain control of the
subsidiary network, while entrepreneurial subsidiary managers fight
for more independence and freedom of action in their local
markets.
- B&G Both have dysfunctional effects on the MNE. o Strategy
1: important markets and subsidiaries are treated in the same
way as unimportant ones, and therefore the opportunities they
provide are not fully exploited.
o Strategy 2: subsidiaries with a distinct, specialized resource
base are unable to excape from an implementer role and unleash
their entrepreneurial abilities.
In response to these problems B&G observed a number of MNEs
have moved towards an organizational model of differentiated rather
than homogenous subsidiary roles and dispersed rather than
concentrated responsibilities. (Either positive or negative) Types
of subsidiary categories
1. Black hole: rather weak unit in terms of specialized
resources, but it is located in a strategically important market.
The MNE can use this unit to maintain a
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presence in a key market in order to keep abreast of new
innovations or strategic moves by competitors, despite a lack of
specialized resources or even profitability in the local subsidiary
unit itself.
a. The black hole status does reflect, however, an undesirable
competitive position in a key market.
i. In the longer run, MNEs may want to commit more resources to
such markets in order to build up their subsidiary, or they may
want to engage in acquisitions or strategic alliances in order to
access complementary resources and improve market success.
2. Implementer: Subsidiary with weaker (or absent) specialized
resources, and located in a market of lesser importance with
respect to the MNEs long-term survival, profitability and
growth.
a. Authors suggest that most MNEs subsidiaries are in this
category. b. Implementers are often key to a firms overall success,
however, because
they may generate a steady stream of cash flow, and may help
build competitive advantage by contributing to companywide scale
and scope economies
3. Strategic leader a. This is a highly competent local
subsidiary in a strategically important
market. The role of this type of business unit is to assist
corporate HQ in identifying industry trends and developing new FSAs
in response to emerging opportunities and threats.
4. Contributor a. Highly competent national subsidiary, but one
located in a less important
market. b. This subsidiary type has typically developed new
FSAs, often as the result
of an entrepreneurial host country management team. Its
subsidiary-specific, specialized resource base might then benefit
other units in the firm if corporate HQ understands its potential
economic value to the entire MNE.
Strategic importance High of the local market
Low Low High Resource base of the subsidiary
Keeping these four subsidiary categories in mind, senior
management at corporate HQ must provide a clear sense of overall
strategic direction, and allocate appropriate roles and
responsibilities to the different subsidiaries in the MNE network;
as a function of the specialized resources they command and the
importance of the market in which they are located. Context and
complementary perspectives
1 3
2 4
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B&G saves it harshest criticism for the homogenized,
undimensional approaches to subsidiary management commonly used by
centralized exporters, international projectors and to some extent
multi-centred MNEs expanding in the post WW2 period up to the mid
80s. While the iron curtain was still up an communist countries
like China remained essentially closed to foreign MNEs, many firms
continued to grow their international operations. Their expansion
into foreign markets typically followed the blueprints of and
conventional cookie cutter patterns of FSA development and
exploitation that had been set by the founders of the firm or its
senior management in the early stages of its international
growth.
1. Chan Kim & Mauborgne on the topic of due process: this
refers to the way strategic decisions are made, irrespective of
their outcome. C&M agree with B&G on that senior maangers
at MNEs faced with strategic management decisions often centralize
the decision-making process, presenting subsidiary managers with a
demotivating fait accompli (something already done) rather than
bring out the best in them. The problem with this is that it
destroys the entrepreneurial spirit and motivation in such
subsidiaries. However, rather than focussing on treating
subsidiaries differently as a function of their specialized
resources and the stratefic importance of their location as
B&G. C&M note that subsidiary managers attach substantial
importance to due process and will usually accept an allocation of
MNE resources that does not benefit their unit. (attach important
to due process, i.e. to the way strategic decisions are made,
irrespective of the outcome = procedural justice)
a. Due process (also called procedural justice) implies that
decision making respects 5 simple principles
i. Corporate hqs familiarity with the local situation at the
subsidiary level
1. This implies that senior managers at corporate hq understand
or at least appear to understand- all the implications of specific
decisions for the subsidiaries affected
ii. Effective two-way communication between corporate hq and
subsidiaries
1. In particular the bottom-up part of this two-way
communication signals that senior managers at corporate hq take
subsidiary managers views seriously and are willing to engage in a
dialogue with these managers
iii. Consistency in decision making across subsidiaries: 1.
Consistency in the sense of adopting clear and transparent
criteria and routines to make decisions across the entire
subsidiary network prevents perceptions of politicized decision
making and favouritism advantaging one subsidiary over another.
iv. Possibility for subsidiary managers to challenge the
dominant perspective at corporate hq
1. This signals to subsidiary managers that senior management at
corporate hq even if confident in its perspective is nonetheless
willing to hear its assumptions and conclusions challenged by
individuals in the trenches, knowledgeable about the local
situation in host countries
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v. A transparent explanation of final decisions made by
corporate hq 1. Here senior management at corporate hq makes a
serious
effort to explain in depth the rationale for the decisions made,
thereby pre-empting any second-guessing or rumours on the
substantive reasoning behind these decisions.
b. Due process can reduce bounded rationality problems in the
MNE i.e. by actively seeking input from host countries.
2. Neghandi, Eshgi and Yuen predate but also complement B&Gs
study by adding the strengths and weaknesses of Japanese MNE
subsidiary management. The conclusion of their article is that
strong FSAs in technology, production and government relations do
not imply a strong FSA in managing a foreign subsidiary network. In
fact, tendencies toward homogenization and centralization prevent
many Japanese MNEs from developing strategic leader subsidiaries,
especially in the real of upstream activities such as R&D.
a. Five main problems found in Japanese MNEs: i. Adopt a
centralized, autocratic approach vis--vis their foreign
subsidiaries, without much evidence of a consensus-based
management style.
1. In many cases, foreign subsidiaries are simply informed after
the fact about important decisions made by senior management at
corporate hq.
ii. Relatively little confidence in the ability of non-Japanese
managers in host countries
iii. Relationships of trust established between corporate HQ and
foreign subsidiaries are usually confined to a few key managers in
these subsidiaries.
iv. Japanese staffing policies are often ethnocentric. Compared
with their Japanese counterparts, non-Japanese managers frequently
face unofficially ceilings on promotion, as well as different
career paths, job security, training options and fringe
benefits
v. Though theyre particularly sensitive to host government
regulation and the rule of law in general, try to avoid unions and
frequently discriminate against women and minorities
Main conclusion that arises is that strong FSAs in technology ,
production and government relations do not imply strong FSA in
managing a foreign subsidiary network. In fact, tendencies towards
homogenization and centralization prevent many Japanese MNEs from
developing strategic leader subsidiaries, especially in the realm
of upstream activities such as R&D.
-
PART 2: Functional issues Chapter 6: International innovation
This chapter examines Kuemmerles idea that many MNEs, particularly
international projectors, are wisely decentralizing their R&D
by building worldwide networks of R&D labs. Building upon the
home-base concept developed by Michael Porter (ch.3), Kuemmerle
indentified two distinct types of host country R&D acilities
based on their primary strategic role inside the MNE:
home-base-exploiting sites and home-base-augmenting sites;
1. Home-base-exploiting sites primarily receives information
form the central lab in the home country and adapt products to
local demand
a. Information flows to the foreign laboratory from the central
lab at home. 2. Home-base-augmenting sites primarily access local
knowledge and send
information back to the central lab a. With these labs,
information generally flows from the foreign laboratory
to the central lab at home. There are two main reasons for this
trend.
- First, many MNEs feel they need to be present in various
knowledge and innovation clusters scattered around the world.
- Second, given the commercial requirement of moving quickly
from innovation to market, MNEs must integrate their R&D
facilities more closely with host country manufacturing operations,
so as to support complex production tasks.
Three key stages in developing of foreign R&D units:
1. Selecting decision makers a. Most set up a technology
steering committee (reporting directory to CEO)
2. Set of decisions and actions that streghten the faclitys
initial capabilities a. Home-augmentening and home-exploiting have
different needs and
require different skills. i. HB Exploiting labs should be
located close to key markets and the
MNEs own foreign manufacturing units so that the firms
technological innovations can be rapidly adapted to host country
requirements if needed, and absorbed by host country manufacturing
operations
1. One of the key bounded rationality problems facing the MNE is
reducing the distance between home country R&D operations and
host country manufacturing operations
2. A home base explointing R&D operation (particularly if
led by managers from within the company) will reduce this
distance.
ii. HB Augmenting labs should be located in critical knowledge
clusters relevant to the MNEs businesses, where they will be well
positioned to tap into new sources of innovations
3. The decisions and actions designed to maximize the labs
contributions to the MNEs overall coroporate strategic goals
a. To maximize the labs contributions to the MNEs strategic
goals, each lab, especially the home-base-exploiting ones, should
interact regularly with the other R&D units, as well as the
firms manufacturing and marketing operations
-
Kuemmerle offers the following 4 qualities of the ideal profile
of R&D unit leaders whom are instrumental to the necessary
knowledge recombination;
- Respected scientists or engineers and skilled managers - Able
to integrate the new site into the companys existing R&D
network - Comprehensive understanding of technology trends - Able
to overcome formal barriers when they seek access to new ideas in
local
universities and scientific communities R&D lab managers
must be able to marshal the resources necessary for the lab to be
successful in meeting its objectives, including new FSA
development. Kuemmerle illustrates that MNEs are increasingly
adopting an interlinked network of host country facilities to
improve their R&D efforts, rather than relying on a centralized
approach with all core R&D performed in the firms home market.
In addition, the labs can play different roles, depending on
whether their primary purpose is to exploit knowledge or augment
knowledge. Chapter 7: International sourcing and production Kasra
Fewdows making the most of foreign factories (HBR) This chapter
will extend the analysis of ch. 5 & 6, looking at how MNEs can
tap their foreign factories. Research based on a wide variety of
sources, including his own consulting work with a dozen large
manufacturing MNEs, 4 year study etc. Ferdows attempts to answer
one key question: How can a factory located outside of a companys
home country be sued as a competitive weapon not only in the market
that it directly serves but also in every market served by the
company?
- Answer depends on the mindset of home country senior managers:
o Senior managers who view their factories merely as sources of
efficient,
low-cost product typically dont allocate their factories many
resources These managers get only what they expect: efficient,
low-cost
production o Senior managers with higher performance expectation
from their foreign
factoris require innovation and customer service as well These
managers generally expect their foreign factories to be
highly productive and innovative, to achieve low costs, and to
provide exemplary service to customers throughout the world.
They allocate their factories more resources and get more in
return
Ferdows observes that the most successful manufacturing MNEs
view their foreign factories as sources of FSAs beyond the ability
to save costs as with conventional offshoring plants. Beyond the
traditional motives such as tariff & trade concessions, cheap
labor, capital, subsidies and reduced logistics costs; MNEs should
levarage their foreign factories to get closer to customers and
suppliers to attract skilled and talented employees, and to create
centres of expertise for the entire company
-
There are three changes in the international business
environment driving the assignment of these new foreign factory
roles;
1. International trade tariffs declined substantially in the
second half of the 20th century, reducing the need to establish
foreign plants merely to overcome trade barriers
2. Modern manufacturing is increasingly technologically
sophisticated (meaning capital-intensive) and has complex
supply-chain requirements
a. MNEs seldom select manufacturing locations based simply on
the lowest possible wages, rather the emphasis is on the overall
productivity level (factors influencing that; infrastructure,
technology, worker education and skills
3. Time frame available to move from development to actual
manufacturing and marketing has become shorter
a. MNEs increasingly co-locate development and manufacturing
activities in highly specialized plants, which then receive broad
geographic mandates within their areas of expertise.
This falls in line with ch. 6 that a successful penetration of
foreign markets requires more than merely transferring
non-location-bound knowledge from the home country to the host
country.
- The subsidiary must develop, in its own right, internationally
transferable FSAs building up the location advantages of the host
country cluster.
The article distinguishes among six possible roles for foreign
manufacturing facilities, based upon two parameters;
1. Strategic purpose of the plant a. Proximity to the market
(importance of output markets for selling the
products) b. Access to low-cost production (factories need to
acces input markets) c. Access to knowledge and skills (often
closely tied to both in- and output
markets) i. Encompasses need to tap into input markets, but the
ultimate goal
is to serve (output) markets with innovative products. 2. The
level of distinct FSAs held by the plant (weak or strong)
Six roles of foreign manufacturing plants
1. Offshore factory a. Primarys purpose simply access low-cost
production factors as an
implementer on the input side b. The plants manufacturing
output, typically predetermined by senior
management in the home country, is then exported. c. This
factory type typically does not develop new FSA + receives
minimum autonomy 2. Server factory
a. Primarys purpose manufacture goods and to supply a
predefined, proximate national or regional output market
b. Market imperfections such as trade barriers, logistics costs
and foreign exchange exposure usually explain the establishment of
such factories in specific host countries
-
c. May engage in some FSA development, but it ultimately has a
narrow charter with relatively little autonomy or specialized
capabilities
3. Outpost factory a. Primarys purpose to gather valuable
information from advanced
host country clusters, mainly on the input side (Similar to
black hole type subsidiaries)
b. On the manufacturing side, this role is usually combined with
that of an offshore (input market driven) or server (output market
driven) factory
4. Source factory a. Primarys purpose gain access to low-cost
production factors on the
input side, similar to an offshore factory. However it also
receives resources to engage in resource recombination and to
develop FSAs that will turn it into a best practice plant in the
MNEs network for the assigned product range More autonomy in terms
of logistics, product customization etc.
b. The MNE sets up source factors in locations with good
infrastructure and a skilled workforce.
i. May be a strategic leader on the input side of the value
chainx, but nonetheless has a narrow charter
5. Contributor factory a. Primarys purpose oriented towards the
host country/region output
market b. Similar to server factory, but it commands stronger
capabilities.
i. More, at the upstream end of the value chain, it is
responsible for resource recombination in the form of process
improvements, new product development, customizations etc
6. Lead factory a. MOST IMPORTANT in terms of resource
recombination and new FSA
development b. Accesses valuable inputs from the local cluster
where it is embedded and
plays a key role in localized manufacturing innovation. i.
Closely connected with both the key players on the input side
(such
as research labs) and the end users on the output side. Overall
an MNE should upgrade its offshore, server and outpost factories so
that they fain the ability to develop FSAs such as source,
cotributor and lead factories.
- However this upgrading requires a high level of commitment, as
it entails a substantial investment of time and resources, as well
as changes in a factors culture and management style!!
Upgrading is spread over 3 stages;
1. Enhancing internal performance (i.e. through employee
training+edu) 2. Accessing and developing external resources (i.e.
strengthening the plants
supplier network and improving logistics integration with
distributors 3. Developing new knowledge that can benefit the
overall MNE network
Emphasis of upgrading lies on the intangible internal strengths
and location advantages rather than tangible (lower costs etc) The
solution lies in specialization.
-
Ferdows cautions managers about 4 common obstacles that may
prevent the upgrading of foreign factories:
1. Fear of relying on foreign operations for critical skills 2.
Treating overseas factories like cash cows and neglecting long-term
investment 3. Creating instability by shifting production in
reaction to fluctuating exchange rates
and costs 4. Enticement of government relocation incentives to
move factories to new locations
that possess minimal potential for upgrading Insert figure page
222 Chapter 8: International finance Lessard & Lightstone How
MNEs should deal with economic exposure (different from transaction
and translation exposure)
- Economic exposure: the (possbibly negative) impact of (largely
unexpected) changes in real exchange rates (on a firms
competetitiveness) relative to the MNEs competitors
o To minimize this impact L&L recommend that senior managers
strive to Have a flexible sourcing structure
I.e. be able to shift production form one country to another
quickly and efficiently
Attain the capability to engage in exchange rates pass through
I.e. capability to raise prices in response to exchange rate
fluctuations without losing sales volume - Transaction exposure:
risk of financial losses resulting from outstanding but
unfulfilled contractual commitments (i.e. sales contracts in
different currency) - Translation exposure: risk of losses
resulting from the translation of accounting
statements expressed in foreign currencies into the home country
currency at consolidation date
The issue is not to understand how fluctuating foreign exchange
rates directly affect the companys income stream, but rather to
gain insights into the longer-term relative inpacts of these
fluctuations on income streams
-
- Ie. If two firms have the exact same structure in terms of
sourcing (pridcut differentiation, flexilbility to shift product)
from a foreign country then a fluctuation of the exchange rate will
affect them in the same way, however if one sources from another
country then it affect the firms differently
o Since the firm with the strongest market position, most
differentiated products and the greatest flexibility to shift
production will incur the lowest negative impact on the net present
value of its future income stream. This can also occur in purely
domestic firms without foreign
operations or product if their market rivals include MNEs whose
competitive position is positively affected by exhange rates for
internationally sourced inputs.
It is important to distinguish between real vs nominal exchange
rates, as it changes in the real exchange rate affect the level of
economic exposure!
- If in the very long run purchase power holds than (starting
from an equilibrium) differences in inflation rates and resulting
price levels between countries should be precisely offset by
corresponding changes in their nominal exchange rate.
o In that case, real exchange rate would be negligible. -
However, causal empiricism teaches that differences do persist in
the medium
term (sometimes several years), and its these real exchange rate
fluctuations that create economic exposure risk for companies:
o In the short run of 6 months to several years, however,
exchange rates are volatile and greatly influence the
competitiveness of companies selling to the same market but getting
materials and labour from different countries
- I.e. if a US company sells and finances within the US then it
has no transaction and translation risk, however if its main
competitor is Japanese it will have an economic exposure.
o When the US dollar depreciates against the yen. Then the US
firm has a competitive advantage, however when the dollars real
exchange rate increases the position will be weakened through
higher relative costs.
o Only in cases whereby the nominal exchange rate changes
between the dollar and yen correspond exactly with differences in
inflation rates between the US and Japan, is purchasing power
parity maintained.
- Nominal rates: The direct exchange rates between currencies o
i.e. nominal rate of 4%
- Real exchange rate: Changes in the nominal exchange rate minus
the difference in inflation rates between two countries
o i.e. real rate 4% - 3% (inflation difference) Economic
exposure not only depends on decision-making inside the individual
firm, but also on choices made by rivals in terms of the geographic
configuration of their investments and their sourcing policies.
According to L&L there are 3 important elements of economic
exposure:
- Economic exposure should be viewed as a parameter that adds
uncertainty to the value of a firms location advantages
-
o Implies that even unfettered access to location advantages in
a desirable geographic area may not lead to long-run competitive
advantage if the economic value attributed to these location
advantages depends on the evolution of macro-level parameters such
as currency exchange rates
- Economic exposure concept also implies that the location
advantages benefitting an MNE should be considered
o Not solely in a positive sense, and on country-by-country
basis, but also as a portfolio of potential risks for future cash
flows.
- MNEs can choose to develop specific FSAs allowing risk
mitigation in the foreign currency are by immunizing their porducts
to economic exposure, thereby allowing full exchange rate pass
through.
o Firms occupying a market leadership position with highly
differentiated products will generally be best positioned to engage
in exchange rate pass through they can adjust their pricing if
necessary to offset any increased
costs arising from economic exposure without incurring a los in
sales volume (for such firms economic exposure is minimal).
Inspired by L&L the following figure provides a
classification of operating exposure at the subsidiary level:
- The vertical axis represents the capability relative to rivals
to adjust its source structure and thus its cost position, to a
potential new exchange rate reality.
- The horizontal axis shows the units capability to pass through
changes in real exchange rates
o Is the subsidiary in a position to pass any price changes on
to its customers? (in 3. This is the case, the firm can do this
without a loss of business)
o 2. MNEs in this quadrant typically sell commodity-type
products, the sales of which can be greatly affected by even a
small price increase (high price elasticity).
-
Also typical for subsidiaries that import products from the
parent company home (FX risk) and that lack a strong market
position in the host country (i.e. lot of competitors)
In the long run managers should consider economic- exposure when
setting strategy and worldwide product planning. Companies that
hedge their transaction exposure but fail to take economic exposure
into account may be actually raising their total exposure They
suggest that companies typically manage economic exposure through
one of three approaches, which tend to be more strategic than
administratively oriented, currency hedging instruments available
for managing contractual exposure:
1. Each business unit is assessed individually, and therefore
configures its own operations in such a way as to reduce its
specific economic exposure
a. This strategy entails a trade-off between increased
production costs and lowered risks
2. Company-wide perspective, whereby a portfolio of businesses
and operational structures is selected with offsetting exposures
which balance each other
a. Result of such diversification is a lower total rate of
exposure across the company, even though individual units may
continue to have higher levels of risk on their own
3. Incorporates flexibility in operational planning. The company
exploits fluctuating exchange rates by switching production between
factories
a. Again, a trade-off is necessary between the increased costs
of carrying excess capacity (so as to allow production transfers)
on the one hand and reduced economic exposure risks on the
other
Managers who cannot set company policy on economic exposure
should not be held responsible for the economic exposure effects of
volatile exchange rates. When assessing the performance of these
managers, senior management should reduce their own bounded
rationality problem by adjusting either performances indicators or
goal-based expectations to eliminate the economic-exposure effects
on performance of fluctuations in real exchange rates. However,
these types of administrative adjustments will be insufficient, and
real bounded rationality reduction will require substantial
investment in communication.
-
Chapter 9: International marketing Theodore Levitt MNEs should
not worry very much about customizing to cultural preferences.
Technology has largely homogenized consumer preferences most
consumers simply want quality, reliability and low price Therefore,
MNEs should focus on offering such products and services. MNEs
should standardize their products and services worldwide in order
to achieve economies of scale, and should implement global
strategies across all markets. Levitt sees the multi-centered MNE
being gradually replaced by centralized exporters and international
projectors
- Technology, communication and travel have revolutionized
commerce and trade, basically conferring additional value to
non-location-bound FSAs, and strengthening the MNEs ability to
deploy and exploit such non-location-bound FSAs, irrespective of
cultural, economic, institutional or spatial distance.
His argument rests on two foundations;
1. Cultures and national societal tastes are not fixed, but are
subject of continuous change, with technology guiding the change to
homogenization
a. Cultural preferences follow one of two paths; i. They
eventually lose relevance to economic decision making ii. Diffuse
to other groups and become the substance of global trends. this is
true for commodities and high-tech products but also for high touch
goods (items where personal interaction among individuals is
critical at moment of purchase or during consumption/usage) and
services Examples: Pizza, pitta bread, jazz, coke, pepsi, McDs,
Sony, Levi
2. Building on point 1, converging tastes now allow companies to
offer globally standardized products, harnessing economies of scale
to deliver high-quality, dependable goods and low cost.
a. High quality and low cost are not mutually exclusive
objectives: i. They represent complementary goals achievable
through
innovation & efficiency. The key is standardized products
that allow for economies of scale in production, as well as in
downstream activities such as distribution and marketing and in
management activities in general. No matter how small or niched a
product area may be, there are always equivalent segements in other
markets worldwide that allow for a global approach satisfying the
above 3 criteria: quality, reliability and low prices.> so
domestic markets are no safe haven Levitt concedes that
administrative heritage and corporate culture play a large role in
determining the success or failure of a firms managerial effect:
there is no one reliable right answer no one formulae. This warning
acts as a reminder that even when adopting a global approach to
marketing, it is effective organization and implementation (i.e.
the MNEs routines and recombination capabilites) that count
-
Chapter 10: Managing managers in the multinational enterprise
MNEs must develop managers with a broad mental map covering the
entirety of the MNE;s geographically dispersed operations. This is
critical to the MNEs long-term profitability and growth, especially
in an era when foreign markets are becoming increasingly important
contributors to innovation and cost reduction at the upstream end
of the value chain, and to overall sales performance at the
downstream end. Managers commanding deep knowledge of internal MNE
functioning represent the MNEs key resource to facilitate
international expansion and to coordinate geographically dispersed,
established operations, such managers are best positioned to
- Engage in the international transfer of non-location-bound
FSAs from the home nation
- Identify the need for new FSA development in host countries
and facilitate such development
- Help combine location-bound and non-location bound FSAs.
Expatriation is the most direct and rigorous way to give managers
this in-depth knowledge of the MNEs internal network, as well as
the abilities to transfer routines abroad and be catalyst for
recombining resources.
- It also gives managers valuable experiential knowledge of the
pressure for good faith local prioritization and other types of
benevolent preference reversal in affiliates.
o Which will reduce bounded rationality problems Black &
Gregersens paper describes the alarming findings that nearly
80& of all mid- to large-sized MNEs send managers abroad at a
significant cost to the company;
- 10-20% of US expatriates actually came back home early because
of dissatisfaction or disillusionment and difficulties to a new
foreign culture
- >30% did not meet senior management expectations - Of those
who completed 25% ended up leaving the company
Black & Gregersens attribute these unfavourable outcomes to
4 common problems in how firms manage their expatriates;
1. Senior managers in the home country often underestimate the
impact of cultural distance on organizational functioning and, as a
result, do not invest sufiecient in programmes to select and train
properly potential candidates.
2. Responsibility for expatriates is often assigned to human
resources managers, very few of whom have an y international
experience
a. little insight in the problems faced and how they remedy
them. 3. Senior managemnt in many MNEs view expatriates as being
well paid and well
looked after, and therefore as having little to complain about
4. Many MNEs mistakingly assume that expatriates do not need help
readjusting
after having returned home, despite the fact that changes will
likely have occurred during their absence.
-
Black & Gregersens: when it comes to successfully managing
expatriate managers, there are 3 best practices;
1. Focus on creating knowledge and developing global leadership
skills a. Both senior management in the expatriates home country
and the
individual sent abroad share a clear understanding of the
expatriations purpose and related expectations.
i. What types of knowledge should be acquired etc. b. Carefull
planning on these issues yield more long-term benefits to both
the
company and the employees than expatriate assignments simply
geared towards filling a staffing shortage or business need
abroad.
2. Make sure that candidates have cross-cultural skills to match
their technical abilities
a. Cross-cultural abilities are often overlooked as companies
tend to send people who are capable but culturally illiterate
effective resource recombination requires a mix of technical and
social skills
3. Prepare people to make the transition back to their home
offices a. Devote substantial attention to reintegrating
expatriates into their home
country after their assignment i. Such a process allow effective
absorption of the former expatriate
into the home countrys professional and personal environment The
authors suggest that it is the simultaneous adoption of all 3
practises that leads to successful expatriate management; adopting
only one or two of the practices does not suffice to achieve
successful assignments In addition to outlining the appropriate way
to manage expatriate employees, Black & Gregersen also discuss
the required personal characteristics for employees to be
high-potential expatriate prospects. Successful companies look for
five characteristics:
1. A drive to communicate 2. Broad-based sociability 3. Cultural
flexibility 4. Cosmopolitan orientation 5. Collaborative
negotiation style
PART 3: Dynamics of global strategy Chapter 11: Entry mode
dynamics 1: Foreign distributors Chapter 12: Entry mode dynamics 2:
Strategic alliance partners Chapter 13: Entry mode dynamics 1:
Mergers and acquisitions Chapter 14: The role of emerging economies
Chapter 15: Emerging economy multinational enterprises Chapter 16A:
International strategies of corporate social responsibility Chapter
16B: International strategies of corporate environmental
sustainability