Transcript CBPA Dean's Research Seminar Series

CBPA
Dean's Research Seminar Series
Presentation of Research
Deepak Sethi
February 23, 2007
Overview of the Research
One among a trilogy of three conceptual papers
Seek to extend the competitive advantage
literature – generic as well as the global business
contexts
1. Refine the dynamic capabilities notion by
presenting a dynamic adaptation framework
• Illustrate its application through case
studies of two firms – Bombay Dyeing and
Reliance
• Submitted for presentation at the SMS 2007
conference
Overview Continued
2. Refines the International Business literature
which traditionally has treated countries as
homogenous entities
– Analysis at country, region or bloc level (e.g.
emerging economies) masks important intra-country
differences and local factors
– MNEs make FDI decisions based on the congruence
of firm strategy and location advantage factors
– Use this framework to explain the vast regional and
sectoral disparities of FDI within China and India
– Submitted to the Academy of International Business
conference
Overview Continued
3. Some traditional conceptualizations no longer
reflect the scale and scope of contemporary
global business operations
– Over emphasis on the costs of doing abroad
– Global business operations are now more
multilateral and not merely bilateral
– Present a conceptual framework that integrates
the costs as well as the benefits of doing business
abroad, in both contexts
– Paper is under review at the International
Business Review
Toward a More Complete Perspective on
Multinationality
A Conceptual Review of the Costs and
Benefits of Doing Business Abroad
by
Deepak Sethi
William Q. Judge
Theoretical Development
•
Hymer’s (1960 / 1976) seminal work first provided the
rationale for FDI – distinguishing it from foreign
portfolio investment
Costs of doing business abroad (CDBA)
•
•
Zaheer (1995) introduced the notion of the liability of
foreignness (LOF)
–
–
–
–
costs due to spatial distance (travel, transportation;
coordination over distance/time zones)
firm-specific costs (unfamiliarity; lack of roots in local
environment)
host country environment costs (lack of legitimacy, economic
nationalism)
home country environment costs
• LOF was deemed synonymous with CDBA
• Several scholars developed this stream further
– Zaheer & Mosakowski (1997) – MNEs not being
embedded in host country’s information networks
– Kostova & Zaheer (1999) and Mezias (2002) took an
institutional theory perspective - lack of isomorphism
with the host country’s institutional environment
– Internationalization process research scholars like
Johanson & Vahlne (1977) attributed it to the lack of
knowledge and psychic distance of host country
(Upsaala Model)
Journal of International Management (2002)
Special Issue on the Liability of Foreignness
• Editors - Luo and Mezias - deemed LOF a precursor to
CDBA
• Sethi & Guisinger argued that LOF is a subset of CDBA
• Zaheer acknowledged that earlier she considered LOF to
be synonymous with CDBA but now she feels the two are
different
• Organizational learning - Petersen & Pedersen
• Evolutionary dynamics - Hennart, Roehl & Zeng
• Socioeconomic theory - Luo, Shenkar & Nyaw
Glaring Differences in Scholarly Perceptions
• Fragmented picture of the phenomenon
• Confusion over the LOF – CDBA Relationship
• Dyadic context of only the host vs home
countries
• Over-emphasis on CDBA
• Benefits accruing to MNEs are not integrated
• Highlighted need for a holistic conceptualization
Phenomenal Changes in the
Global Business Environment
•
•
•
•
Hostility towards MNEs and FDI during the 50s and 60s
Economic imperialism (Sovereignty at Bay - Vernon 1971)
Polarization due to Cold War, sheen of socialist economy
Dramatic changes since the 80s - economic liberalization,
collapse of Soviet Union, technological developments
• Global trade increased 25-fold since 1970 and is now 25%
of world GDP (UNCTAD, 2004)
• FDI increased 279% between 1992 and 2002
• Multi-country operations and global alliances – have
implications on the costs as well as benefits to MNEs
Reappraising Liability of Foreignness
• LOF – additional costs of foreign firm relative to host country rival
• Purely dyadic context – home vs host country
• Notion of host country and relative costs ? – examples
• Discriminatory regulations, prejudice – formidable & debilitating
substantially reduced due to economic liberalization
• Incidental – cultural differences, lack of information and roots
also reducing due to trend towards joint ventures, alliances
• Costs outside the dyadic context - due to multilateral linkages
• Distinction essential since their sources, magnitude and
mitigating factors are quite different
• CDBA has two components
– traditional LOF (dyadic context)
– a new notion Liability of Multinationality (LOM)
Liability of Multinationality (LOM)
• Costs incurred outside the host country environment
– Ford’s Chinese subsidiary ‘s LOF and LOM
• Coordination costs of multi-country operations across
spatial distance and multiple time zones
• Transacting with MNE’s global network of subsidiaries
and alliances - costs of different Microsoft subsidiaries
• Hedging against exchange rate volatility
• Monitoring regional and global business environment
• Monitoring multilateral institutions (WTO, IMF, EU)
• Opportunity costs of missed multi-point pricing options
Conceptual Framework
• Disaggregating CDBA into LOF and LOM reflects the
scale, scope and complexity of global business today
• Current International Business literature presents an
imbalanced view of FDI – overemphasizes Costs
• Benefits not integrated in a holistic conceptualization
• Institutional economics literature analyzes only the
benefits of economic development to host countries
• Conceptual framework integrates costs as well as
benefits – both in dyadic as well as multilateral contexts
• The 2 x 2 matrix introduce two more notions
– Assets of Foreignness (AOF)
– Assets of Multinationality (AOM)
Conceptual Framework
Costs
Benefits
Host Country Context
Multinational Context
I. Liability of Foreignness (LOF)
II. Liability of Multinationality (LOM)
Economic nationalism, prejudice
Host government restrictions
Lack of local information
Cultural differences
Lack of local relationships
Lack of isomorphism with local
institutional environment
Spatial distance, multiple time zones
Transacting with global network of
subsidiaries and alliances
Hedging - exchange rate volatility
Monitor global business environment
Monitoring policies of NGOs, WTO,
IMF, and regional economic groups
III. Assets of Foreignness (AOF)
IV. Assets of Multinationality (AOM)
Incentives from host government
Proprietary tech; brand equity
First-mover advantages
Ability to influence national
legislation and policy
Ability to leverage domestic
learning into a new context
Leverage international alliances and
networks.
Leveraging of knowledge from
MNE’s subsidiaries.
Leverage multipoint pricing options.
Strength of international strategic
presence and stature