lecture 2 FDI.docx

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Business Administration
Business Administration 1220E
Trevor Hunter

The Impact of Transnationals and FDI 1/11/2011 1:29:00 PM Why do businesses “go global”?  Firms seek to increase profits through international production and sales  Two general strategies o Differentation: adding value to a product so consumers will pay more for it o Low-cost: providing value to consumers at a lower cost than competitors Porter: to increase sales, either be so different, or low cost Examples of Primary activities:  Smelting  Auto manufacturing  Software design Example of Support activities:  IT support  Inventory distribution -The efficiency of the primary and support value chain activities affect the profitability of the firm -Doing what you do best- ie. Your “core competence” is a more efficient use of money -Higher efficiency=higher profit -firms tend to maximize efficiency by doing what they do (primary activities) and outsourcing what they have to do to support what they do (support activities) to places that can do them more efficiently (ie. Cheaper)  ex. IT services, customer support centers to India -firms become more efficient through the conversion of resources into capabilities or competencies -Resources:  factors that a firm possesses which, when utilized provide value -Capabilities/competencies:  the ability to effectively use the resources a firm possesses to create value -Examples of firm resources:  organizational culture  patents  proprietary technology -Examples of capabilities/competencies:  excellent service  new product development  marketing research  back to idea of firms going global: -firms that operate internationally tend to:  possess resources and capabilities that are unique and transferable beyond their home market and earn greater rewards from them  have become as efficient as they can operating in their home market -operating internationally allows firms to gain greater efficiencies by capturing location economies -Location economies:  ** locating different value chain activities in the optimal location (regardless of which country it is) to capitalize on lower factor costs or particular skills associates with each activity -Location economies arise from the fact that difernt countries have different national comparative advantages -National comparative advantages:  different resource endowments or competencies or cost advantages that are prevalent within and relatively unique to a given country or society Sources of a Nation’s Comparative Advantage: Strategy, Structure and Rivalry Factor Endowments Demand Conditions Related & Supporting Industries -all 4 must be present Strategy, structure and rivalry:  -given industry in the given country, what is the strategy, structure, is the industry competitive and innovative, non innovative will not provide a non comparative  -private or publically owned? in a monopoly or government/state owned company, they don’t need to compete Factor endowments:  Literacy levels, lack of pollution, water  Natural resources around the world are not planned, by luck  These factor endowments allow or create a dynamic, creative, healthy workforce Demand conditions:  For companies to go global and be good at something, they need money, because most start small, they start locally then global, need critical mass of users within their domestic environment  USA can become huge internationally, Canada has to go global before it can reach the same numbers as the US -Examples of National Comparative Advantages:  India, software development, IT services  Germany-product engineering, chemicals  Japan- mirco electronics, automobiles  Switzerland- banking, pharmaceuticals  Mexico- auto parts  Canada-natural resources- extracting, banking -Capturing location economies has two effects:  1) firms can differentiate product offerings by capitalizing on the particular competency prevalent in that country o knowing that a diamond comes from NWT or that a car has “German engineering” has some “value” to the consumer, know it wont be a blood diamond  2) it can lower the costs of value creation by capitalizing on low costs of production o buying raw materials form a low-cost source or manufacturing products in a country with low labour costs will reduce the end-users’ cost -Sales side-operating internationally allows firms to gain greater efficiencies by capturing scale economies -Scale economies:  reduction in unit costs by producing large numbers. Cost reduction comes from more efficient use of equipment and experience -the Experience Curve  unit costs to accumulated output, as you move from first, it will be expensive, by the millionth one, it will cost pennies  -firms may have saturated their home market with their products to a point where further profit growth is limited -there may be other markets in the world where they can sell their products -the more firms can sell of the same thing the more efficient (profitable) they will be -but……. Strategy and Competitive Advantage  firms cannot always sell the same thing everywhere, so they have to develop the right strategy for their industry, company and the context in which they operate  generally there are two pressures that determine the type of strategy international business will follow: o 1)cost reduction o 2) local responsiveness  pressures for cost reductions: o firms will likely respond by mass-producing a standard product in the optimal locations worldwide o greatest in industries producing commodity type products where price is the main competitive weapon, when there are many strong competitors, excess capacity, powerful consumers and low switching costs  examples of industries that face cost reduction pressure: o nickel o computer hardware o pulp and paper o auto parts o clothing and shoes o food  Pressures to be locally responsive o Differences in consumer tastes and preferences between countries o Differences in infrastructure and traditional practices o Differences in distribution channels o Differences in host government demands  Firms use 4 basic strategies to compete in the international environment: ***chart in text o International strategy o Multi-domestic strategy o Global stragegy o Transnational strategy (Cost pressures, pressure for local responsiveness on chart, 4 fit in, global top left, international bottom left, transnational top, multi-domestic bottom)  International Strategy: o Firms transfer resources and capabilities developed in the home market to foreign markets while undertaking some limited local customization o They may suffer form a lack of extensive local responsiveness and an inability to exploit location and scale economies  Multi-domestic Strategy: o Firms customize their products, marketing and business strategy to national conditions o They may suffer from an inability to transfer resources, capabilities and products between countries and therefore may not be able to exploit scale and location economies  Global Strategy: o Firms focus on reaping cost reductions from scale and location economies, producing large numbers of the same product. So-called “world products” o May suffer from a lack of local responsiveness  Transnational Strategy: o Firms exploit scale and location economies, transfer resources and capabilities throughout the firm and pay attention to local preferences. There needs to be an effective flow of knowledge within the transnational firm o Sounds simple right?  International business strategy is complex and affected by numerous factors that are difficult to judge and analyze  That is why although many firms go global, few do so successfully, and they t
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