What are the four distances in the CAGE framework?
- Cultural
- Economic
- Geographic
- Administrative/Political
Describe cultural distance.
- Languages
- Values and power distance relationships
- Ethics
- Trust within a company’s ranks and within external stakeholders
Describe administrative/political distance?
- Familiarity with political and legal systems decreases administrative burdens and reduces likelihood of mistakes/liability
- Access to some markets may depend on administrative membership (ex. free trade groups, sanctions)
- Increase distance raises complexity in human resources, financial reporting, regulatory environment, etc
Describe geographic distance.
- Distance
- Time Zones
- Travel time
- Affects transportation, communication, and coordination costs
- Natural resources are present only in some locations
- Talent is clustered in some locations
- Transportation costs are not uniform even within a country
- Communication and coordination costs rise with global operations
Describe economic distance.
- Economic development level
- Consumption level
- Relative size of economy
- There are measured using GDP, GDP per capita, GDP growth, Human Development Index
- Purchasing power
- Wage levels
- Market size
- Market attractiveness
What are the two inherent disadvantages a multinational firm might face?
- Liability of foreignness
- Domestic firms have lower distance and superior knowledge of the local market
Do empirical studies show a link between gradual international expansion and increased profitability?
No, they do not
Name some advantages of MNC’s?
- Superior technical know-how
- Ability to leverage existing reputation, brand image, goodwill
- Larger size leads to scale and slope economies
- Managerial expertise and experience
- Ability to locate activities elsewhere
- Information advantages
- Risk diversification across countries
Describe scale & scope economies.
- Increased bargaining power
- Scale helps cover high fixed costs in capital intensive industries
- Lower input costs due to scale and scope
- Logistics, promotion, and distribution scale economies
- Lower financing costs and lower credit risk
Name some potential disadvantages of MNC’s?
- Foreign exchange risk
- Host country regulations
- Different legal systems
- Political risks (Ex. Nationalization, War)
- Operational difficulties (Ex. Adaption to local business practices)
- Cultural differences
- Coordination costs
Name the ways in which small/medium firms learn about internationalization.
- Joining a domestic trade association
- Joining a regional trade association
- Affiliation with multinational firm as part of international supply chain, also called indirect exporting because the large company exports the smaller company’s products, smaller company learns about
Name all entry modes and whether they are equity or non-equity.
- Exporting (non-equity)
- Licensing (non-equity)
- Franchising (non-equity)
- Management contract (non-equity)
- Turnkey operation (non-equity)
- Strategic alliances (non-equity, but sometimes lead to acquisition)
- Equity alliance (Equity)
- Joint ventures (Equity)
- Wholly-owned subsidiaries (Equity)
- Note all equity are also Foreign Direct Investment
True or false, the more control you have, the more commitment you have made?
True
Name the six reasons why exporting might not be feasible.
- When production abroad is cheaper than at home
- When transportation costs to move goods or services internationally are too expensive
- When companies lack domestic capacity
- When products and services need to be altered substantially to gain sufficient consumer demand abroad
- When governments inhibit the import of foreign products
- When buyers prefer products originating from a particular country
What are the two non-collaborative foreign equity arrangements?
- Acquisition of existing facilities
- Greenfield Investment-Building New Facilities
Why do firms want control?
- Freedom to pursue a global strategy
- Internalization (Can be cheaper than outsourcing)
- Appropriability (Retain possession of vital resources such as exclusive technology)
General Motives for Collaboration
- Spread and reduce costs
- Specialize in competencies
- Avoid or counter competition
- Secure vertical and horizontal links
- Learn from other companies
IB Specific Motives for Collaboration
- Gain location-specific assets
- Overcome legal constraints
- Diversify geographically
- Minimize exposure in risky environments
Describe licensing.
A company grants intangible property rights to another company to use in a specified geographic area for a specified period in exchange for royalties. Can be exclusive/nonexclusive and used to protect intangible property. Can include patents, copyrights, trademarks, franchises, methods, procedures, etc.
Describe franchising.
A specialized from of licensing. You pay to own a store under a particular brand name such as Tim Hortons. Includes providing intangible assets and operational assistance on a continuing basis.
Describe a strategic alliance.
An agreement to closely collaborate/integrate on a long term basis. May include exclusivity to distribute products/services. Combines strength of each alliance member. No equity investment. Member with closest end-customer relations often has advantages of control, data gathering, etc.
Describe a management contract.
A company is paid a fee to transfer management personnel and administrative know-how abroad to assist a company. Used in international business when the foreign company can manage better than the owners.
Describe turnkey operations.
One company contracts another to build complete, ready to-operate facilities. Most commonly performed by industrial-equipment, construction, and consulting companies. Often performed for a government agency.
Describe an equity alliance.
An arrangement in which at least one of the companies takes an ownership position in the other.
