CHAPTER 8 - KEY POINTS
Terms in this set (7)
Globalisation and implications
Internalisation occurs through trade (sale and shipment from one country to another) and direct investment (building and acquiring assets in another country). Industry can be categorised on the basis of their internalisation according to the extent and mode of their internalisation - sheltered, trading, multi-domestic and global.
Sheltered industries are served exclusively by native firms. They are localised in nature. Good and services they offer are primary fragmented service industries, some small-scale manufacturing and industries producing products that are non-tradable because they are perishable or difficult to move.
Trading industries are those where internalization occurs primary through imports and exports. If a product is transportable, not nationally differentiated and subject to scale economies, exporting is the most efficient means to exploit overseas markets. This applies to commercial aircrafts, shipbuilding, as well as products whose inputs are available only in a few locations.
Multidomestic industries are those that internationalize through direct investment either because trade is not feasible (hotels) or because product is nationally differentiated (frozen meals).
Global industries are those in which both trade and direct investment are important. Most large-scale manufacturing industries tend to evolve towards global structures: in cars, beer, levels of direct investment are high.
Implications for industry analysis
The forces driving both trade and direct investment are desire to exploit market opportunities in other countries and desire to exploit resources and capabilities located in other countries.
(1) Industry structure. Firms internationalise because of lower barriers to tap into national markets. They might be encouraged to globalise because of increased industry rivalry in local economy or increased buyer power. (2) Competition. Another reason could be increased intensity of competition. (3) Profitability. Other things remaining equal, internationalisation tends to reduce an industry's margins and rate of return on capital.
The theory of comparative advantage states that a country has a comparative advantage in those products that make intensive use of those resources available in large quantities within that country. Bangladesh has an abundant supply of unskilled labour. Thus, it has a comparative advantage in products that make intensive use of unskilled labour such as clothing, handicrafts and leather goods. Term comparative advantage refers to relative efficiencies of producing different products. As long as exchange rates are well behave, comparative advantage translates into competitive advantage.
Porter's diamond framework
Porter's diamond model explores the process through which particular industries within a country develop the resources and capabilities that can confer an international competitive advantage. The four factors highlighted by Porter are factor conditions related to supporting industries, demand conditions and strategy, structure and rivalry. There needs to be consistency between firm strategy and national conditions for firms to exploit national strength.
Factor conditions emphasise the role of highly specialised resources many of which are 'home grown'. For example: superiority in film production is associated with concentration of highly skilled labour.
Related and supporting industries that can boost national competitiveness are associated with clusters of industries. For instance: Silicon Valley comprises computer, software and venture capital firms.
Demand conditions provide primary driver of innovation and quality improvement. As an example: Japan's dominant share of the world's market for cameras is related to companies taking advantage of enthusiasm for amateur photography and adoption of innovation in cameras.
National competitive performance is related to strategies and structures of firms in those industries. For instance: role of intense domestic competition in driving innovation, efficiency and the upgrading of competitive advantage.
Determining optimal location for value chain activities
Firms enter foreign markets in pursuit of profitability. The profitability of entering a foreign market depends upon attractiveness of that market and if can firm establish competitive advantage within it. Market attractiveness can be magnet for foreign multinational but over long term, the key determinant of profitability is likely to be the ability to establish competitive advantage regarding local firms and other multinationals
Firm's potential for establishing competitive advantage has important implications for the means by which it enters foreign market. The basic distinction is between market entry by transactions and by direct investment. Market entry strategies are related to resource commitment by the firm. AT one extreme, there is exporting through individual spot-market transactions; at the other is the establishment of wholly owned, fully integrated subsidiary.
Market entry strategies
Transactions (low resource commitment)
o Spot sales
o Long-term contract
o Foreign agent / distributor
o Licensing patents and other IP
Direct investment (high resource commitment)
o Marketing and distribution only
o Fully integrated
Wholly owned subsidiary
o Marketing and distribution only
o Fully integrated
Factors relevant to market entry strategies
If the firm's competitive advantage is country based, the firm must exploit an overseas market by exporting. For instance: Tata Motors' competitive advantage is low domestic cost base, it must produce in India and export to foreign markets.
Barriers to trade
If the product is not tradable because of transportation constraints or import restrictions, then assessing that market requires entry by investing in overseas production facilities or by licensing the use of key resources to local companies within the overseas market. Other barriers include exchange rate risks and information cost.
Resources and capabilities
Competing in overseas market is likely to require that the firm acquire additional resources and capabilities, particularly in market and distribution. Assessing such resources is most easily achieved by establishing a relationship within firms in overseas market. It might appoint distributor or agent with exclusive territorial rights. Firm might also license its product or technology to the local manufacturer. Alternatively, the company might pursue a joint venture with the local firm.
Appropriate returns of trade
Whether a firm licenses the use of its resources or choose to exploit directly depends on appropriatability considerations. If a company has patent protection, patent licenses to particular producers can be an effective means of appropriating returns. With all licensing arrangements, key considerations are the capabilities and reliability of the local license.
A key issue that arises in licensing trademarks or technology concerns the transaction costs of negotiating, monitoring and enforcing the terms of such agreement as compared with internalisation through fully owned subsidiary. In expanding overseas, Starbucks owns and operates most of the coffee shops while McDonalds franchises.