6. The international context

Drivers of industry globalisation

• Cost drivers: lower costs of communication and transport.
• Market drivers: homogeneity of demand; more markets mean more potential customers, demand and opportunities.
• Government drivers: the role and opportunities governments create, for example borderless trade within the EU.
• Competitive drivers: competition stimulates innovation and lowers prices for consumers.

Foreign direct investment (FDI): a stake of more than 10% in a foreign firm, which gives substantial influence and makes the investor a co-owner.

The problem of international configuration

How an organisation shapes its activities across borders depends on the balance between globalisation and localisation. Globalisation has three dimensions:

• Global scope: the firm operates or does business worldwide rather than in one place or region.
• Global similarity: homogeneity in the world, less international variation.
• Global integration: everything is interrelated, so an event in one country affects other countries and markets.

Globalisation also occurs at three levels: organisations (micro level: the extent to which firms have a global strategy, culture, workforce, management team and resources), markets or industries (meso level: growing similarity of global customer demand and product flows) and economies (macro level: unemployment, inflation, productivity, trade and investment converge).

Internationalisation consists of international scope (in how many and which countries are we active?) and international distribution (how are the value-adding activities spread over those countries?). To select an attractive country, firms use PESTEL, Porter's five forces and the CAGE model, which measures the distance between home and target country on four dimensions: cultural, administrative, geographic and economic.

Motives for going abroad: natural resource seeking, market seeking, efficiency seeking and strategic asset seeking.

Bartlett and Ghoshal: four organisational models

Based on standardisation, coordination and centralisation:

Corporate-level international strategies

• Multi-domestic strategy: the firm develops an idea, brings it to the home market and then goes abroad through FDI; foreign subsidiaries become copies of the parent, with all value chain activities present in each subsidiary.
• Global strategy: firms go international immediately and use unique features of countries to benefit maximally (for example production in China, storage in Germany, marketing in the US). Such firms are called born global companies: they invest globally at once and gain experience afterwards.
• Transnational strategy: a combination of both (commonly summarised as "think global, act local").

International product life cycle

A product develops from innovation to international sales. After a successful innovation demand and sales rise; then competitors appear with similar products, prices fall and the market becomes saturated. At that point firms often internationalise to enlarge the market again, sometimes adapting the product to local rules or needs, while developing new innovations and selling the older product more cheaply. First movers can recover R&D costs faster before competitors arrive, sometimes protected by a patent. Successful products become standard products; less successful ones disappear. Selling in new markets extends the life cycle, so firms can profit longer.

Industry clusters

An industry cluster is a group of firms and institutions from the same sector located close together. It leads to more innovation, job growth, spin-offs and better infrastructure and services. Three types:

Reading 12.3 (Porter, clusters): clusters are geographic concentrations of interconnected firms, suppliers and institutions in one industry (Silicon Valley, a wine cluster). They affect competition by (1) raising productivity, through access to specialised workers, suppliers, knowledge and infrastructure, complementarity and motivation from local rivalry, (2) driving innovation through exchange of knowledge and (3) stimulating new business formation (spin-offs). Clusters often arise from historical circumstances or strong local demand and then grow in a self-reinforcing cycle, but can weaken through external changes such as new technology or changing customer needs. Strategy implications: location choice, local cooperation, upgrading the cluster (education, infrastructure) and collective action.

Global synergy

• Market position synergy: serving customers across countries, for example with the same product or brand worldwide.
• Activity synergy: integrating processes across countries for economies of scale or to use local advantages.
• Resource synergy: sharing, moving or copying money, technology, knowledge or staff between countries.

Global convergence versus international diversity

Global convergence: markets become more alike through better communication, transport and lower costs, so products and processes can be standardised for economies of scale. International diversity: countries differ in culture, language, habits and conditions, so firms must adapt locally. Success requires a balance, for example through glocalisation (a global concept adapted to local needs) or by placing different activities in different countries.

Douglas and Wind say standardisation can work when a global market segment with similar needs exists, when synergies from standardisation are possible and when good communication and distribution infrastructure is present. Constraints are external (laws, trade restrictions, differences in marketing infrastructure and competition) and internal (the need to adapt locally, local management that resists central standardisation).

Textbook deepening: De Wit, Ch. 12 (The international context)

The sections below add the theory from the textbook chapter on the international context to the lecture notes above.

International variety and international linkages

Two questions define the international context. (1) International variety: how different are countries (consumer behaviour, language, legal system, infrastructure, business culture, education, labour relations, political ideology, distribution, taxes)? (2) International linkages: how strongly do events in one country affect others? Tight links are called international integration, weak links international fragmentation (for example US interest rates or Rotterdam oil prices spill over to other countries; highly integrated countries are "squares on a chessboard"). A movement towards lower variety and tighter linkages is globalization; towards more variety and looser linkages is localization. Together these questions form the issue of international configuration, split into international composition (which countries) and international management (how to organise across borders).

Dimensions of globalization in the book's terms

Example McDonald's: globalizing but far from global in scope (about half of the world's countries, often only big cities; more than half of revenue and most top managers from the US), relatively global in similarity (highly standardised, some menu and interior adaptation) and only slightly global in integration (little need for concerted action). Localization is the opposite: decreasing scope, similarity and integration; the most local businesses (hairdressing, driving schools) can even be local below national level.

At the meso level De Wit distinguishes globalization of markets (similar worldwide demand and easy product flows; crude oil and currencies are global, accountancy services and garbage collection local) from globalization of industries (a set of producers competing worldwide; cars and consumer electronics are global; accountancy is a relatively global industry although its markets are local; hairdressing and retail banking are local). The globalization of one activity (e.g. marketing) does not mean globalization of all activities.

International composition: growth options and entry modes

Internationalization is starting value-adding activities in another country. International growth options (Figure 12.2):

1. Export via an agent or distributor (or direct sales, travelling salesperson): least taxing.
2. Export via a sales subsidiary: higher investment in marketing, sales force and after-sales service.
3. Foreign production subsidiary (off-shore production): manufacturing goods to be exported to other markets.
4. Integrated foreign subsidiary: full range of activities including production and sales.

A subsidiary can be set up by acquisition or greenfield entry (from scratch), independently or as a joint venture; firms can also network with local partners instead. A country portfolio can be displayed in a GE-type matrix with country attractiveness (market growth, competitive intensity, buyer power, loyalty, regulation, operating costs) against competitive position (Figure 12.3). Internationalization only makes sense if cross-border synergies offset the extra costs of foreignness and distance.

International management: integration mechanisms

• Standardization: doing the same in each country without costly adaptation (offerings, activities, resources); important for economies of scale and for border-crossing clients who want a predictable offering.
• Coordination: aligning varied activities across countries, e.g. global service level agreements, countering customers who play subsidiaries off against each other (cross-border price shopping), or cross-subsidization: attacking a few markets with profits from many (Prahalad and Doz).
• Centralization: concentrating activities in one location for scale, a country's competitive advantage (lower costs, higher quality) or faster learning and quality control of knowledge-intensive activities.

The chosen levels determine the organizational model. In Bartlett and Ghoshal's original terms, the decentralized federation is the "multinational" (also multi-domestic) model, the coordinated federation the "international" model, the centralized hub the "global" model and the integrated network the "transnational" model. Figure 12.4 adds the typical flows and controls:

The paradox of globalization and localization

Since the mid-1980s researchers (Bartlett and Ghoshal, Porter, Prahalad and Doz) moved beyond organizational design to the strategic motives: standardization is a means to achieve cross-border synergies, the raison d'être of the international firm. A firm that fully adapted locally without leveraging a homegrown quality would have no advantage over local firms, but would carry the extra costs of distance and foreignness.

Demand for global synergy (Figure 12.5; the wider the geographic scope, the greater the benefit):

• Aligning positions: dealing with cross-border customers (coordinated offerings for travellers or global advertisers, one central account, countering subsidiary shopping) and with cross-border competition (concentrating global power on a few national markets to defeat local rivals country by country, and defending against such attacks).
• Integrating activities: scale advantages (pooling production, logistics, procurement, R&D; also via joint procurement or marketing campaigns) and location advantages (centralising activities where inputs are cheap or specialised, or where attractive buyers and related industries are, Porter).
• Leveraging resources: reallocation (moving money, machinery and people to where returns are higher, e.g. older machinery to less advanced markets) and replication (copying knowledge and capabilities across borders).

Demand for local responsiveness: the ability to respond to each national market in a timely and adequate manner; more pressing the more dissimilar the markets. Nine differences between countries:

Responsiveness is more than adaptation: simple adaptation can be reactive and slow, responsiveness means being proactive and fast. Example: Nespresso in China (a standardised global business model with clubs and boutiques in a tea culture: keep the model or adapt?).

The global convergence perspective in more detail

Convergence is visible in clothing, TVs, cars, phones, music and food compared with 30 years ago. It is driven by the ease, low cost and frequency of communication, transport and travel: technology has beaten distance and created a "global village" in which best practices are copied quickly, setting in motion cultural, political, technological and economic convergence. Inertia (vested interests, commitment to systems, habits, fear of change) can only slow it down, not reverse it, so firms should be guided by the emerging global reality (Ohmae). Consequences: standardised production, international product development, exchange of marketing knowledge, centralization of activities in large-scale facilities at the best locations; buyers shop around globally and competitors act globally, so global industries arise. This requires a global firm with a strong centre (centralized hub). Globalizing companies are both a consequence and a driver of further convergence. Example: Unilever's "global jewels" (Dove, Knorr, Lipton, Magnum, Omo, Axe) and its scale in buying and marketing, although local taste preferences limited global brands.

The international diversity perspective in more detail

Global brands (Swatch, Big Macs, Coke, Toyota) do not prove convergence: firms may simply be using similarities that always existed. The same soft drink is consumed in different places, times, circumstances and for different reasons; cultural norms and values are extremely stable. Languages are re-emphasised (Ireland, Baltic states, Catalonia, Quebec), political power shifts to regions (Russia, US), and legal, fiscal, educational and technological systems are locked in. Convergence and divergence forces interact in a dynamic balance (Dosi and Kogut); convergence is simply easier to spot. Economic integration (NAFTA, EU, WTO) progresses slowly with political barriers. Firms should treat diversity as an opportunity: different national climates create different innovations and competences that can be leveraged to other countries (then adapted). This requires a transnational (Bartlett and Ghoshal) or heterarchical (Hedlund) organization, or in very diverse businesses a federative form. Example: Sesame Street's Afghan co-production Baghch-e-Simsim (dancing replaced by "exercise", The Count omitted, Afghan muppet Zari).

Managing the paradox of globalization and localization

• Balancing: trading off global synergy and local responsiveness, e.g. Coca-Cola giving up some global standardization to adapt locally; the search for a better balance continues. Global presence still provides advantages in local markets (scale, R&D and branding budgets, as at Unilever).
• Navigating: sequential international initiatives, first for synergy, then for responsiveness; harder than at corporate level because cultural and institutional differences add complexity.
• Resolving: "glocalization" is often a fast but superficial answer (going global while adapting locally, e.g. Veggie McNuggets in India, McLobster in Canada); since almost every global company adapts somewhat, the term is "close to empty". It comes from the Japanese dochakuka (global localization, originally adapting farming techniques to local conditions), which should be understood as Yin Yang balancing, not a quick fix. A real synthesis is the international franchise (Pizza Hut, McDonald's, KFC), which elegantly handles local food cultures and import restrictions.
• Embracing: cultural tensions within firms are managed with culture training, but can also be exploited through the New International Division of Labour (Fröbel et al.): labour-intensive production in low-wage countries, R&D in countries with high education and infrastructure (Uniqlo: cashmere in China, high-tech garments in Japan; firms in Silicon Valley, designers in Italy, software engineers in India, lawyers in London). Companies combine countries' relative advantages instead of seeking one global standard.

The international context in international perspective

After WWII, FDI grew faster than trade. After 2000 a global shift occurred: labour-intensive production moved from the first newly industrialising countries (Singapore, Hong Kong, Taiwan, South Korea) to Indonesia, Thailand, Malaysia and Bangladesh; China, India, Russia, Turkey and Brazil became economic powers and markets; BRIC firms on the FT Global 500 rose from 20 to 61 (2006 to 2015). Yet most trade and FDI remain within the triad (US, Europe, East Asia); many MNEs are regional rather than global, and the more strategic the asset (R&D, headquarters, ownership), the less global it is (Rugman, Ghemawat).

• Nationalism: strategists from strongly nationalist countries lean to the international diversity perspective, those from less nationalist countries to global convergence.
• Country size: firms from small countries internationalise early without home scale economies and are used to adapting, so they tend to favour international diversity; firms from large countries grow big at home with standardization and a domestic management style, and tend to see similarities and standardise.
• Technology: the Uppsala model (Johanson and Vahlne) sees internationalization as an incremental process from the domestic market outward; Born Globals (Airbnb, Alibaba, Logitech, HTC, Zara) start global from inception using global IT infrastructure and strong intangible, technological and relational resources. Hennart: they sell niche products at low information, transport and adaptation costs to expert customers worldwide.
• Industry level: cars need local adaptation (Europeans want good engines, Americans large comfortable cars, Japanese small cars); pharmaceuticals hardly need product adaptation but face strong national regulation (approval, liability, price controls).

Readings in the book's framing

Levitt (12.1) states that "the world's needs and desires have been irrevocably homogenized", driven by technology; the multinational corporation is "obsolete and the global corporation absolute". His focus is on the globalization of markets (demand side, similarity), less on industries and integration. Douglas and Wind (12.2) respond that convergence is not a one-way street, and that many new technologies actually lowered the minimum efficient scale, so scale is not an irreversible force towards globalization. Porter (12.3) is the bridging reading: clusters are "critical masses, in one place, of unusual competitive success in particular fields"; enduring competitive advantage in a global economy increasingly lies in local things (knowledge, relationships, motivation) that distant rivals cannot match.