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CASE STUDY MNC STRATEGY

EIGHTH EDITION

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“In this eighth edition, the authors have maintained the unique pedagogic philosophy that has been a hallmark of this special book for so long. With a full suite of companion teaching and learning materials, the three parts of the book, strategic imperatives, the organizational challenge and managerial implications have captured the tensions that continue to dominate cross-border management… This remains an outstanding book.” Peter W. Liesch, Professor of International Business, UQ Business School, The University of Queensland

“If I were an MBA student studying anywhere in the world this is the book I would want as the textbook for my global strategy course. As a faculty member, this is the book I would pick for my case-based global strategic management course.” Lorraine Eden, Professor of Management, Texas A&M University. President, Academy of International Business

“I have been using Transnational Management in my MBA International Competitive Strategy Courses for over 10 years. Since then I have not been able to find another text which compares with the relevance, applicability, and readability of this one.” P. Roberto Garcia, Ph.D., Young-Jin Kim Distinguished Clinical Professor of International Business. Director, Center for International Business Education & Research

Transnational Management offers an integrated framework describing the strategic tasks, organizational capabilities, and management roles and responsibilities of successful and responsible managers of international businesses in today’s global environment.

NEW TO THIS EDITION:

• Integrated conceptual framework • Ten brand new cases have been added, and four others have been updated • New academic and practitioner recommended readings have been added to

each chapter

Suitable for MBA, executive education, and senior undergraduate students studying international management, international business, or global strategy courses, Transnational Management offers a uniquely global perspective on the subject.

TRANSNATIONAL MANAGEMENT

Text and Cases in Cross-Border Management

CHRISTOPHER A. BARTLETT & PAUL W. BEAMISH

Transnational Management Text and Cases in Cross-Border Management

Transnational Management provides an integrated conceptual framework to guide students and instructors through the challenges facing today’s multinational enter- prises. Through text narrative and cases, the authors skilfully examine the development of strategy, organizational capabilities, and management roles and responsibilities for operating in the global economy.

The key concepts are developed in eight chapters that are supplemented by carefully selected practical case studies from world-leading case writers. All chapters have been revised and updated for this eighth edition to reflect the latest thinking in transnational management while retaining the book’s strong integrated conceptual framework. Ten new cases have been added, and four others updated. A full range of online support materials are available, including detailed case teaching notes, almost 200 PowerPoint slides, and a test bank.

Suitable for MBA, executive education, and senior undergraduate students studying international management, international business, or global strategy courses, Trans- national Management offers a uniquely global perspective on the subject.

Christopher A. Bartlett is Professor Emeritus at Harvard Business School. His research and teaching have focused on strategic and organizational challenges confronting managers in multinational corporations. He is the author or co-author of nine books, including Managing Across Borders: The Transnational Solution (co-authored with Sumantra Ghoshal 2002), which was named by the Financial Times as one of the 50 most influential business books of the twentieth century. He has also researched and written over 100 case studies and teaching notes, and is Harvard’s best-selling case author with over 6million copies sold. In 2001, he received the Academy of Manage- ment’s International Division’s Distinguished Scholar Award. He is a Fellow of the Academy of Management, the Academy of International Business, the Strategic Man- agement Society, and the World Economic Forum.

Paul W. Beamish is the Canada Research Chair in International Business at the Ivey Business School, University of Western Ontario. He has received best research awards from the Academy of Management and the Academy of International Business. He was previously Editor-in-Chief of the Journal of International Business Studies. His cases have been studied over 3million times, with over 20 winning awards. In 2012, he was the recipient of the International Management Outstanding Educator Award and, in 2017, the recipient of the International Management Eminent Scholar Award, both from the Academy of Management. He is the editorial director of Ivey Publishing, and director of Ivey’s International Business Institute. He is a Fellow of the Academy of International Business, Royal Society of Canada, and Asia Pacific Foundation of Canada.

Transnational Management Text and Cases in Cross-Border Management

CHRISTOPHER A. BARTLETT Harvard University, Massachusetts

PAUL W. BEAMISH University of Western Ontario

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CONTENTS

List of Figures page vii List of Tables x Preface xv Acknowledgments xvii Editorial Advisory Board xix

Introduction: So What Is Transnational Management? 1

Part I The Strategic Imperatives 9

1 Expanding Abroad: Motivations, Means, and Mentalities 11 Cases 1.1 Sher-Wood Hockey Sticks: Global Sourcing 29 1.2 Cameron Auto Parts: Early Internationalization 39 1.3 Mabe: Learning to be a Multinational (A) 47

2 Understanding the International Context: Responding to Conflicting Environmental Forces 64 Cases 2.1 Global Wine War 2015: New World Versus Old 83 2.2 MTN and the Nigerian Fine 104 2.3 IMAX: Expansion in BRIC Economies (Revised) 118 2.4 Mahindra & Mahindra in South Africa 134

3 Developing Transnational Strategies: Building Layers of Competitive Advantage 151 Cases 3.1 United Cereal: Lora Brill’s Eurobrand Challenge 167 3.2 Yushan Bicycles: Learning to Ride Abroad 176 3.3 Beer for All: SABMiller in Mozambique 183 3.4 GE’s Imagination Breakthroughs: The Evo Project 193

Part II The Organizational Challenge 213

4 Developing a Transnational Organization: Managing Integration, Responsiveness, and Flexibility 215 Cases 4.1 Kent Chemical: Organizing for International Growth 235 4.2 Lundbeck Korea: Managing an International Growth Engine 245

4.3 Philips versus Matsushita: The Competitive Battle Continues 259 4.4 Beiersdorf AG: Expanding Nivea’s Global Reach 276

5 Creating Worldwide Innovation and Learning: Exploiting Cross-Border Knowledge Management 293 Cases 5.1 P&G Japan: The SK-II Globalization Project 306 5.2 Applied Research Technologies, Inc.: Global Innovation’s Challenges 324 5.3 Cisco India (A): Innovation in Emerging Markets 333

6 Engaging in Cross-Border Collaboration: Managing Across Corporate Boundaries 345 Cases 6.1 Nora-Sakari: A Proposed JV in Malaysia (Revised) 364 6.2 Eli Lilly in India: Rethinking the Joint Venture Strategy 376 6.3 Amazon and Future Group: Rethinking the Alliance Strategy 392

Part III The Managerial Implications 405

7 Building New Management Capabilities: Key to Effective Implementation 407 Cases 7.1 Levendary Café: The China Challenge 425 7.2 Unilever’s Lifebuoy in India: Implementing the Sustainability Plan 436 7.3 Silvio Napoli at Schindler India (A) 452 7.4 Larson Inc. in Nigeria 468

8 Shaping the Transnational’s Future: Defining an Evolving Global Role 476 Cases 8.1 IKEA’s Global Sourcing Challenge: Indian Rugs and Child Labor (A) 496 8.2 Barrick Gold Corporation – Tanzania 507 8.3 Unilever’s New Global Strategy: Competing Through Sustainability 520

Index 541

vi Contents

LIST OF FIGURES

Figure 1 The structure of the book page 5 Figure 1.1 A learning model of internationalization 23 Figure 1.2 Approaches to foreign market entry 24 Case 1.1 Exhibit 3 Evaluation of Global Sourcing 34 Case 1.3 Exhibit 1 Mabe’s Company History, 1946 to 2009 49 Case 1.3 Exhibit 2 Mabe’s Historical Revenues, 1987 to 2010 50 Case 1.3 Exhibit 3 Mabe Income by Region, 1990 to 2011 51 Case 1.3 Exhibit 9 Mabe’s Product Line in Russia 59 Case 1.3 Exhibit 10 Main Appliance Players in Russia 60 Case 2.1 Exhibit 2 Wine Industry Value Chain 88 Case 2.1 Exhibit 3 Wine Consumption Per Capita, Selected Countries

(1980–2014) 90 Case 2.1 Exhibit 5 Global Wine Sales by Volume and Value (1999–2013) 92 Case 2.1 Exhibit 8 Exports as % of Production Volume by Source: EU,

New World, and Globally, 1961–2009 96 Case 2.1 Exhibit 9a China Wine Sales Volume by Retail Sale Point and

Country of Origin, 2009 99 Case 2.1 Exhibit 9b Bottle Wine Positioning in China by Price Segment

and Area of Origin (%), 2014 99 Case 2.2 Exhibit 4 MTN’s Organizational Structure, 2014 110 Case 2.3 Exhibit 4 IMAX Corporation Stock Performance, 2008–2013 124 Case 2.3 Exhibit 6 Economic Comparison of the BRIC Economies 127 Case 2.3 Exhibit 7 Population and Average Household Income for 15 Most

Affluent Cities 128 Case 2.3 Exhibit 8 Country Culture Comparison of BRIC Countries 131 Case 2.3 Exhibit 10 BRIC Countries’ Governance Indicators (Percentiles) 133 Case 2.3 Exhibit 11 BRIC Population Age Distribution 2013 and 2020

(Projected) 133 Case 2.4 Exhibit 5 Mahindra and Mahindra – Business Segments 142 Figure 3.1 The integration–responsiveness framework 154 Figure 3.2 Category-specific strategies to help companies serve

middle-class consumers in emerging economies 157 Case 3.1 Exhibit 4 Organization Chart 175 Case 3.2 Exhibit 1 Yushan Bicycles Organizational Structure 178 Case 3.4 Exhibit 2 GE Corporate Structure 197 Case 3.4 Exhibit 3 GE’s Operating System 198 Case 3.4 Exhibit 4 Evolution Locomotive Product Specifications 201

Case 3.4 Exhibit 6 CECOR Tool Kit 204 Case 3.4 Exhibit 7 GE Transportation Organizational Chart 207 Case 3.4 Exhibit 8 Comte’s Marketing Organization 209 Figure 4.1 Stopford and Wells’ international structural stages model 216 Figure 4.2 Organizational configuration models 220 Figure 4.3 Integrated network model 226 Figure 4.4 Integration and differentiation needs at Unilever 227 Figure 4.5 Model I: the traditional change process 231 Figure 4.6 Model II: the emerging change process 232 Case 4.1 Exhibit 2 KCP International Division Organizational Chart, 2000 238 Case 4.1 Exhibit 3 Kent Chemical Products Organizational Chart, 2006 240 Case 4.1 Exhibit 4 Decision Matrix for Resource-Allocation Decisions on the

European Fire Protection Business 244 Case 4.3 Exhibit 5 Organization of METC, 1985 270 Figure 5.1 Mobilizing knowledge 305 Case 5.1 Exhibit 2 P&G European Organization, 1986 308 Case 5.1 Exhibit 3 P&G’s Worldwide Organizational Structure, 1990 309 Case 5.1 Exhibit 5 P&G Organization, 1999 (Post O2005 Implementation) 314 Case 5.1 Exhibit 6 Beauty Counselor Work Flow 315 Case 5.1 Exhibit 7 In-Store SK-II Counter Space 316 Case 5.1 Exhibit 8 Representation of Global Cleansing Cloth Development

Program 318 Case 5.1 Exhibit 9 Illustration of Part of SK-II Product Line 319 Case 5.2 Exhibit 1 ART Organization with Filtration Unit Detail 326 Case 5.3 Exhibit 2 Cisco India R&D Evolution 337 Case 5.3 Exhibit 3 Indian Telecom Industry 338 Case 5.3 Exhibit 4 Telecom Network Structure 340 Case 5.3 Exhibit 5 Cisco’s R&D Project Approval Process 342 Figure 6.1 Range of strategic alliances 347 Figure 6.2 Partner selection: comfort vs. competence 357 Case 6.1 Exhibit 1 How 4G LTE (And Mobile Broadband) Works:

A Simplified Network Representation 366 Case 7.1 Exhibit 1 Levendary Organizational Chart 427 Case 7.2 Exhibit 2 Lifebuoy’s Indian Relaunch, February 2002 440 Case 7.2 Exhibit 3 Unilever Sustainable Living Program (USLP): Original

Targets 2010 444 Case 7.2 Exhibit 4 Unilever Corporate Organization Structure 445 Case 7.2 Exhibit 5 Lifebuoy Core Claim: Protection against Germs 446 Case 7.2 Exhibit 6 Unilever Behavior-Change Model 449 Case 7.3 Exhibit 2 Schindler Organization Chart, Elevator and Escalator

Division 457 Case 7.3 Exhibit 4 Schindler India Organization Chart 461 Case 7.3 Exhibit 5 Indian Elevator Market, Structure, and Product

Segmentation 462 Case 7.3 Exhibit 6 Market Research on Indian Elevator Market, 1996 463

viii List of Figures

Case 7.4 Exhibit 1 The Ridley Report 470 Case 8.2 Exhibit 2 Barrick Spending on Corporate Social Responsibility

in Tanzania 517 Case 8.3 Exhibit 2 Unilever’s Compass Vision and USLP Goals 523 Case 8.3 Exhibit 3 Unilever’s Virtuous Cycle Business Model 525 Case 8.3 Exhibit 4 Unilever Corporate Organization Chart 527 Case 8.3 Exhibit 5 Persil/ Omo “Dirt Is Good” Campaign 530 Case 8.3 Exhibit 6 Unilever’s Transformational Change Priorities 533 Case 8.3 Exhibit 7 Unilever’s Stock Price vs. DJIA and P&G, 2009–2014 535 Case 8.3 Exhibit 8 Unilever’s USLP Achievements, 2014 536

List of Figures ix

LIST OF TABLES

Table 1.1 Selected indicators of FDI and international production, 2010–2015 page 14

Table 1.2 Internationalization statistics of the 100 largest non-financial MNEs worldwide and from developing and transition economies 15

Table 1.3 Comparison of top MNEs and selected countries: 2016 16 Case 1.1 Exhibit 1 NHL Share of Hockey Stick Brands and their

Manufacturing Sites 32 Case 1.1 Exhibit 2 Types of Global Sourcing 34 Case 1.1 Exhibit 4 Hourly Compensation Costs in Manufacturing (US$) 36 Case 1.2 Exhibit 1 Income Statements 41 Case 1.2 Exhibit 2 Balance Sheets 44 Case 1.2 Exhibit 3 Data on McTaggart Supplies Ltd 45 Case 1.3 Exhibit 4 Mabe’s Balance Sheet 2006–2008 (000s USD) 52 Case 1.3 Exhibit 5 Mabe’s Income Statement 2006–2008 (000s USD) 53 Case 1.3 Exhibit 6 Global Appliance Players, 2011 53 Case 1.3 Exhibit 7 Appliances Market Size in China, India, and Russia 2005

to 2010 54 Case 1.3 Exhibit 8 Marginal Contribution Per Appliance in China, India, and

Russia 2008 (per cent) 54 Case 1.3 Exhibit 11 Mabe’s Entry Strategy and Positioning, 2008 and 2012 61 Table 2.1 Changes in national investment policies, selected years 2003–2015 73 Case 2.1 Exhibit 1a Retail Price Structure of a Typical EU Wine in Select

Export Markets (€ per bottle), 2014 87 Case 2.1 Exhibit 1b Bottle Wine Segments by Retail Price (European

Commission’s Categories), 2014 87 Case 2.1 Exhibit 4 Wine Production and Consumption: Selected Old World

and New World Countries, 2014 91 Case 2.1 Exhibit 6 Penfolds Red Wine U.S. Brand Structure, 2009 93 Case 2.1 Exhibit 7a Top-10 Global Wine Companies by Volume, 2003

and 2014 94 Case 2.1 Exhibit 7b Top-10 Global Wine Brands, 2009 and 2014 94 Case 2.2 Exhibit 1 MTN Subscribers, June 2015 106 Case 2.2 Exhibit 2 MTN’s Top Risks and Mitigation Strategies, 2014 108 Case 2.2 Exhibit 3 MTN’s Strategy 109 Case 2.2 Exhibit 5 Nigerian Telecommunications Usage, 2015 112 Case 2.2 Exhibit 6 Telecommunications Industry in Nigeria in

November 2016 113

Case 2.2 Exhibit 7 Nigeria Worldwide Governance Indicators 114 Case 2.2 Exhibit 8 Nigeria’s Economic Trends 115 Case 2.3 Exhibit 1 IMAX Worldwide: Screens, Box Office, Demographics,

and Urbanization 120 Case 2.3 Exhibit 2 IMAX Corporation Balance Sheets, 2010–2013

(in Thousands of $) 122 Case 2.3 Exhibit 3 IMAX Corporation Income Statements, 2010–2013

(in Thousands of $) 123 Case 2.3 Exhibit 5 Exhibitor-Branded Premium Large Format Screens, by

Region 126 Case 2.3 Exhibit 9 Risks in the BRIC Economies 132 Case 2.4 Exhibit 1 South Africa – Business Environment Rankings 136 Case 2.4 Exhibit 2 South Africa: Total Vehicle Sales, Production, Exports

and Imports, 2006–2010 138 Case 2.4 Exhibit 3 Mahindra & Mahindra South Africa – Leader Brands’

Production 138 Case 2.4 Exhibit 4 South Africa – Customer Segmentation, December 2010 140 Case 2.4 Exhibit 6 Mahindra & Mahindra – Consolidated Income

Statement 143 Case 2.4 Exhibit 7 Mahindra & Mahindra – Indian Domestic Market Shares

by Volume 144 Case 2.4 Exhibit 8 Mahindra & Mahindra South Africa – Income

Statement 146 Case 2.4 Exhibit 9 Mahindra & Mahindra South Africa – Sales Volume 147 Table 3.1 Scope economies in product and market diversification 158 Table 3.2 Worldwide advantage: goals and means 159 Table 3.3 Strategic orientation and configuration of assets and capabilities

in international, multinational, global, and transnational companies 163

Case 3.1 Exhibit 1 United Cereal Selected Financial Results (USD in 000s) 170 Case 3.1 Exhibit 2 United Cereal SG&A by Market (USD in 000s) 171 Case 3.1 Exhibit 3 Test Market and Consumer Panel Results 172 Case 3.2 Exhibit 2 Yushan Bicycles Selected Financial Data, 2015 (NT$) 179 Case 3.2 Exhibit 3 Yushan Bicycles Australia Subsidiary Selected Financial

Data, 2015 (NT$) 180 Case 3.4 Exhibit 1 GE Financial Performance, 1995–2006 ($ millions) 195 Case 3.4 Exhibit 5 IB Review Preparation: Sample Questions 203 Table 4.1 Organizational characteristics of decentralized federation,

coordinated federation, and centralized hub organizations 222 Case 4.1 Exhibit 1 Kent Chemical: Summary of Financial Data,

2003–2007 ($ millions) 237 Case 4.2 Exhibit 1 Top Pharmaceutical Markets, 2005 246 Case 4.2 Exhibit 2 Leading Anti-Depressants and Alzheimer’s Disease

Medications in the Global CNS Market, 2005 248 Case 4.2 Exhibit 3 Lundbeck Financial Highlights, 2005 250

List of Tables xi

Case 4.3 Exhibit 1 Philips Group Summary Financial Data, 1970–2008 (Reported in millions of Dutch Guilders (F) to 1996; Euros (€) after 1997 262

Case 4.3 Exhibit 2 Philips Group, Sales by Product and Geographic Segment, 1985–2003 (Reported in millions of Dutch Guilders (F) to 1996; Euros (€) after 1997 263

Case 4.3 Exhibit 3 Philips Research Labs by Location and Specialty, 1987 265 Case 4.3 Exhibit 4 Matsushita Creed and Philosophy (Excerpts) 268 Case 4.3 Exhibit 6 Matsushita, Summary Financial Data, 1970–2000a 274 Case 4.3 Exhibit 7 Matsushita, Sales by Product and Geographic Segment,

1985–2000 (billion yen) 275 Case 4.4 Exhibit 1 Beiersdorf Subsidiaries 278 Case 4.4 Exhibit 2 Major Innovations under the Nivea Brand Umbrella 282 Case 4.4 Exhibit 3 Beiersdorf Balance Sheet 2008–2011 285 Case 4.4 Exhibit 4 Beiersdorf Income Statement and Additional Financials

2008–2011 286 Case 4.4 Exhibit 5 Biggest Global Competitors (Overview) 287 Case 4.4 Exhibit 6 Global Market Segmentation, 2010 288 Case 4.4 Exhibit 7 Competitors (Overview of Selected Market Shares) 289 Case 5.1 Exhibit 1 P&G’s Internationalization Timetable 307 Case 5.1 Exhibit 4 P&G Select Financial Performance Data, 1980–1999 312 Case 5.1 Exhibit 10 Global Prestige Market: Size and Geographic Split 320 Case 5.1 Exhibit 11 Global Skin Care Market Size: 1999 Skin Care

(Main market and prestige) 320 Case 5.1 Exhibit 12 Skin Care and Cosmetics Habits and Practices: Selected

Countries 321 Case 5.1 Exhibit 13 Global SK-II Cost Structure (% of net sales) 322 Case 5.2 Exhibit 2 Wagner’s List of Potential Markets 328 Case 5.2 Exhibit 3 ART Mini Water Oxidation System—Development

Committee Team Structure 330 Case 5.2 Exhibit 4 Market Research: Summary Data 331 Case 5.2 Exhibit 5 Summary Sales and Profit Forecast for RIMOS 332 Case 5.2 Exhibit 6 Summary Risk Analysis and Risk Mitigation for RIMOS 333 Case 5.3 Exhibit 1 Cisco Revenue Breakdown by Product and Geography 335 Table 6.1 Scope of activity 360 Case 6.1 Exhibit 2 Mobile Networks: Evolution and Comparison 366 Case 6.1 Exhibit 3 Malaysia: Background Information 368 Case 6.1 Exhibit 4 Finland: Background Information 369 Case 6.2 Exhibit 1 World Pharmaceutical Suppliers 1992 and 2001

(US$ millions) 377 Case 6.2 Exhibit 2 India’s Economy at a Glance 380 Case 6.2 Exhibit 3 Top 20 Pharmaceutical Companies in India by Sales

(Rs billions) 381 Case 6.2 Exhibit 4 Values at Eli Lilly-Ranbaxy Limited 385 Case 6.2 Exhibit 5 Eli Lilly-Ranbaxy India Financials 1998 to 2001 (Rs’000s) 387

xii List of Tables

Case 6.2 Exhibit 6 Lilly Financials 1992 to 2000 (US$ millions) 388 Case 6.2 Exhibit 7 Product Segment Information

Lilly and Ranbaxy 1996 and 2000 389 Case 6.2 Exhibit 8 Ranbaxy Financials 1992 to 2000 (Rs millions) 390 Case 6.3 Exhibit 1 E-Commerce Sales as a Percentage of Total Retail Sales 393 Case 6.3 Exhibit 2 Comparison of Large E-Commerce Retailers 395 Case 6.3 Exhibit 3 Comparison of Large Offline Retailers 396 Case 6.3 Exhibit 4 Amazon.com Financials 398 Case 6.3 Exhibit 5 Future Enterprises Financials 402 Case 7.1 Exhibit 2 Levendary Income Statement 2010 (dollars in 000s) 429 Case 7.1 Exhibit 3 Comparison of Two Levendary U.S. and Two Levendary

China Locations 434 Case 7.1 Exhibit 4 Levendary China Income Statement (2010) 435 Case 7.2 Exhibit 1 Unilever Financial Performance, 1990–2012 ($ millions) 437 Case 7.2 Exhibit 7 Lifebuoy India P&L: 2006 to 2012 (€ thousands) 450 Case 7.2 Exhibit 8 Lifebuoy Behavior-Change Program Options:

2013 Projected Costing (values in Rs.) 451 Case 7.3 Exhibit 1 Schindler Top Management Profiles 455 Case 7.3 Exhibit 3 Schindler India: Key Managers’ Profiles 459 Table 8.1 MNE–stakeholder relationships in emerging markets: a typology 481 Table 8.2 The Global Compact’s ten principles 493 Case 8.1 Exhibit 1 IKEA Stores, Fiscal Year Ending August 1994 499 Case 8.1 Exhibit 2 IKEA History: Selected Events 500 Case 8.1 Exhibit 3 “A Furniture Dealer’s Testament”—A Summarized

Overview 502 Case 8.1 Exhibit 4 IKEA in Figures, 1993–1994 (fiscal year ending

August 31, 1994) 503 Case 8.1 Exhibit 5 The U.N. Convention on the Rights of the Child:

Article 32 506 Case 8.2 Exhibit 1 Three Types of Engagement Behaviors 513 Case 8.2 Exhibit 3 Total Amount of Money Spent on Community

Development Projects, 2006 (in US$) 519 Case 8.3 Exhibit 1 Unilever Financial Performance, 1995–2014 ($ millions) 521

List of Tables xiii

PREFACE

This book grew out of the authors’ strongly held belief that the best research in the academic fields of international business and cross-border management did more than capture the activities, challenges, and best practices from the field. It also translated those findings into practical and relevant lessons for managers and students of management. That philosophy and commitment has shaped the content of Transnational Management over the 25 years since it was first published, and remains at the core of this eighth edition. Indeed, it was our commitment to deliver current, relevant, and practical research

in an engaging format to the students who will be tomorrow’s business leaders that led us to make an important change with this new edition. As we became increas- ingly concerned that many textbooks – including this one – were being priced beyond the means of many of those we were trying to reach, we decided to work with a publisher whose commitments more closely aligned with ours. So this eighth edition of Transnational Management begins our exciting new relationship with Cambridge University Press, a publisher that shares our values. In the quarter-century since the first edition of Transnational Management was

published, much has changed in the field of multinational enterprise management. In the rapidly evolving global environment, new external demands have required innovative new strategic responses, flexible new organizational capabilities, and adaptive new management capabilities. But many seasoned observers who have operated in the global business environment for decades will insist that despite these differences, the core agenda remains remarkably constant. They make a convincing case that beyond ongoing and inevitable adjustments and refinements, the tensions that characterize cross-border management remain much as they have always been: understanding the world’s inexorable evolution toward an integrated strategic whole, yet being sensitive to the constantly evolving impediments and constraints to that ideal; recognizing global and regional opportunities while also being aware of cross-cultural differences and responsive to host country demands; developing the ability to be fast, flexible, and adaptive while also overcoming the barriers to such seamless implementation due to the reality of the distance, language, time, and culture that separate worldwide operations. We are reminded of this debate with each revision of this volume, as faculty

colleagues weigh in on both sides. They remind us that, in many ways, both views are correct. On the one hand, we receive passionate input from those anxious for brand new material that reflects the vibrancy of the field and keeps up with the latest developments. But we also hear from colleagues who recognize the

importance of the ongoing cross-border management tensions, often best captured in classic cases that teach timeless international management issues. Based on input that we constantly receive from the users of this text as well as

from the valuable expert reviews to which each new edition is subjected, we have sought to maintain this balance. As you will see in the following pages, while we have maintained the intellectual integrity of the core concepts, we have also undertaken a major updating of each of the chapters to ensure they reflect the current global context. As a new feature, we have added an extended list of recommended practitioner-oriented readings at the end of each chapter. Where possible, we have used the authors’ wording of their article abstracts. We have also provided expanded annotated footnotes of relevant theory. And we have retained our practice of changing about half the case material in this edition, aiming to capture the emerging issues to keep courses fresh, while retaining popular classic cases that have maintained their relevance and have a proven history of stimulating strong classroom engagement and learning. We trust you will find that the new content, new format, and new publisher

support we have assembled for the eighth edition offer a relevant, insightful, and stimulating framework through which to explore the rich territory of transnational management.

xvi Preface

ACKNOWLEDGMENTS

Transnational Management has greatly benefited from comments, suggestions, and insights generously offered by colleagues at the hundreds of institutions around the world that have adopted this book. In particular, we would like to acknowledge the key role played by the Cambridge University Press panel of reviewers whose insights and suggestions for the chapter content of the eighth edition proved extremely helpful. They are listed on page xix as our Editorial Advisory Board. We are also extraordinarily grateful to the colleagues who have contributed to

this edition. Co-authors who have collaborated on our own case studies for this edition include faculty colleagues Professors Harold Crookell, Brian J. Hall, IsaiahA. Litvak, Aloysius Newenham-Kahindi, Albert Wöcke, and Michael Y. Yoshino, as well as Research Associates and doctoral students R. Azimah Ainuddin, Heather Beckham, Nicole Bennett, Carole Carlson, Nikhil Celly, Dwarka Chakravarty, Vin- cent Dessain, Charles Dhanaraj, Perry L. Fagan, Vanessa Hasse, Arar Han, Sarah McAra, Paul S. Myers, Michael Roberts, Anders Sjoman, Laura Winig, and Megan (Min) Zhang. We are also delighted to include additional new case studies authored by Luis Arciniega, Ivy Buche, Ramasastry Chandrasekhar, Meeta Dasgupta, Charles Dhanaraj, Tashmia Ismail, Srivardhini K. Jha, Rishikesha Krishnan, José Luis Rivas, Jean-Louis Schaan, and Margaret Sutherland. Assembling a textbook always involves coordinating many components, but this

is particularly true at a time of transition from one publisher to another. We could not have managed this without the great help provided by the skilled support staff who worked with us over many months to coordinate the flow of emails, phone calls, manuscripts, and other documents between the United States, Canada, and Australia. At Ivey, this includes PhD candidates Dwarka Chakravarty, Yamlaksira Getachew, Max Stallkamp, and Jenny Zhu. However, we would like to offer special thanks to Research Associate Mila Bojic for helping us through the long and arduous revision process. This eighth edition also represents an important publishing landmark that merits

recognition. As mentioned in the preface, we are delighted to be working with Cambridge University Press as our new publisher. To Valerie Appleby, our Commis- sioning Editor, and Caitlin Lisle, our Development Editor, we offer our grateful thanks not only for your helpful input and continual support, but also for your patience and tolerance through a long and challenging transition process. We look forward to continuing our productive working relationship for many years to come. Finally, we would like to acknowledge the lasting contribution of our good friend

and colleague, the late Sumantra Ghoshal, who passed away in 2004. Sumantra was a founding co-author of this book and left an enduring imprint on the field of

international management and beyond. His wisdom and insights still glow brightly in this volume. But more than his sharp intelligence, we miss his warm, convivial, and energetic company. Despite the best efforts of all the contributors, responsibility for any remaining

shortcomings of the book rests with us. Our only hope is that they are outweighed by the value that you find in these pages and the exciting challenges that they represent in the constantly changing field of transnational management.

xviii Acknowledgments

EDITORIAL ADVISORY BOARD

Ernst Verwaal, KU Leuven, Belgium

Neal Hartman, MIT, United States

Ian Towers, SRH Hochschule Berlin, Germany

Derek Condon, Birmingham Business School, University of Birmingham, UK

John Powell, University of Exeter Business School, UK

Our thanks also to those reviewers who wish to remain anonymous.

Introduction So What Is Transnational Management?

Few managers operating in today’s international business environment would dispute that this is an extremely exciting time to be engaged in almost any aspect of cross-border management. Fast-changing global developments have created big challenges that appear unusually complex, but at the same time they have opened up new opportunities that seem almost limitless. Around the world, managers are asking questions like the following: How

does the unraveling of the long anticipated Trans-Pacific Partnership (TPP) trade agreement affect our business? What can we do to manage the political disruption and economic dislocation following Brexit? How can we take advantage of the continued rise in Asian markets? How should we deal with the threat of new competitors emerging from developing countries? Can we exploit the impending boom in big data to track and exploit new global trends? How might we harness fast-growing social networks to leverage our cross-border management connections and organizational processes? Before we launch into these and the other such rich and engaging discussions,

perhaps we should step back for a moment to review the broad territory we will be exploring on our voyage of discovery. A good place to start might be with the title of this book. What exactly does Transnational Management mean?

Transnational: What Does That Imply?

The first word on the cover of this book may not be familiar to some. While the terms “multinational,” “international,” and “global” are in widespread general use, it may not be entirely clear to you why we chose to use the less familiar description “transnational” in the title of this book. Good question. And we promise to respond to it by the end of Chapter 1. By the

end of that opening chapter it should be clear to you that we use those four terms quite specifically. Furthermore, you will find that our distinction between “multinational,” “international,” “global,” and “transnational” will become a strong theme that runs through this book in our discussion of strategy, organization, and management. But more of that later. For the purpose of this introduction, let’s just recognize

that the “transnational” qualifier indicates that our focus will be on the manage- ment challenges that face companies whose operations extend across national boundaries. Indeed, the concepts we will be presenting in the text are grounded in extensive research published in a book titled Managing Across Borders: The

Transnational Solution. The challenging cross-border management issues identified in that five-year long, multicompany, worldwide research project supplemented with a large body of subsequent research frames our agenda. So what is different about cross-border management? In what ways do the

challenges facing a manager of a multinational enterprise (MNE) differ from those facing his or her counterpart in a purely domestic organization? There are many such differences, but let’s begin by identifying half a dozen of the most important that will be reflected in the issues we explore throughout this book.

• The most obvious contrast derives from the fact that, by definition, MNEs have operations in multiple nation-states, a difference that has huge strategic, organ- izational, and management implications. Although domestic companies must take account of local and state governments, what distinguishes intercountry differences from the intracountry ones is the powerful force of national sover- eignty. Unlike the local or regional bodies, the nation-state generally represents the ultimate rule-making authority against whom no appeal is feasible. Conse- quently, the MNE faces an additional and unique element of risk: the political risk of operating in countries with different legislative requirements, legal systems, and political philosophies regarding a host of issues including private property, free enterprise, human rights, and corporate responsibility – that a domestic company can simply take for granted.

• Cross-border management must also deal with a greater range of social and cultural differences. Again, domestic companies experience some regional cultural differences, but in cross-border operations the stakes are much higher. An MNE will quickly flounder unless management is not only embedded in the community and able to speak the local language, but also is both sensitive and responsive to local cultural norms, practices, preferences, and values.

• By having operations in foreign countries, an MNE is exposed to a wide range of economic systems and conditions that they must understand and to which they must adapt. The differences may be built into political systems ranging from unfettered free enterprise to highly regulated socialist economies; they may be reflected in various stages of economic development from advanced OECD countries to extremely poor less developed countries; and they may be facilitated or constrained by differences in national infrastructure ranging from subtle differences in technical standards to the quality of basic communications services. Each variation in the underlying standards or support systems demands significant modifications to an MNE’s strategy and operations.

• Another major way in which cross-border management diverges from domestic management relates to differences in competitive strategy. The purely domestic company can respond to competitive challenges within the context of its single market; the MNE can, and often must, play a much more complex competitive game. Global-scale efficiencies or cross-border sourcing may be necessary to achieve a competitive position, implying the need for complex international logistical coordination. Furthermore, on the global chessboard, effective competi- tive strategy might require that a competitive challenge in one country might call

2 Introduction

for a response in a different country – perhaps the competitor’s home market. These are options and complexities a purely domestic company does not face.

• In terms of metrics, a purely domestic company can measure its performance in a single comparable unit – the local currency. But because currency values fluctu- ate against each other, the MNE is required to measure results with a flexible and sometimes distorted measuring stick. In addition, its results are exposed to the economic risks associated with shifts in both nominal and real exchange rates.

• Finally, the purely domestic company manages its activities through organiza- tional structures and management systems that reflect its product and functional variety; the MNE organization is intrinsically more complex because it must provide for management control over its product, functional, and geographic diversity. And the resolution of this three-way tension must be accomplished in an organization whose managers are divided by barriers of distance and time, and impeded by differences in language and culture.

Management: Why This Focus?

The Transnational in the title is simply a qualifier for Management and, in the final analysis, that is what this book is really about. In many ways, it is a focus that distinguishes this volume from many others in the field. For that reason, let’s take a moment to understand why. The serious study of cross-border management is a relatively recent phenomenon.

For many decades, international business research focused mainly on global envir- onmental forces, international systems and structures, and powerful institutions like home- and host-country governments, all of which framed the context within which the MNE had to operate. In these studies, countries and industries rather than companies were the primary units of analysis, and most international policy attention (as well as academic research) focused on macro analysis of key indicators such as trade flows and foreign direct investment patterns. During the 1960s and 1970s, this interest in global economic forces and inter-

national institutions began to be matched by an equal focus on the MNE as the primary driver of the rapidly expanding international economy. A decade later, as the task of running such companies became more complex, attention again expanded to encompass an understanding of the roles, responsibilities, and rela- tionships of those running the MNEs. And so there opened a field of management that had been largely neglected by

both practitioners and researchers up to that point. Indeed, until the 1970s, many companies had staffed their international operations with aging or less competent managers, instructing them to simply take the most successful domestic products, strategies, and practices, and transfer them abroad. But in the closing decades of the twentieth century, as new offshore markets opened up, global competition intensi- fied, and worldwide operations became more complex, it was clear that such an approach was doomed to failure. Only the most capable managers would be able to run the modern MNE.

Management: Why This Focus? 3

This book builds on the lessons that came out of that burst of innovation in cross- border management that has continued into the first decades of the twenty-first century. So while we will reflect on the changes taking place in the macro global environment, and specifically on the way in which these forces affect MNEs, we will do so by adopting a management interpretation, viewing these fast-changing global forces through the eyes of the executives who operate in the thick of it. It is this management perspective that has framed the design of this book and

the pedagogy that supports it. But unlike many other courses in international management that have been constructed around the traditional functions of the company – R&D, manufacturing, marketing, etc. – we have rejected this conceptual approach. Our experience is that the most important issues facing today’s business leaders rarely come packaged in such neatly defined and hermetically sealed bundles. Almost all real-world problems cut across functional boundaries and require executives to understand the issue in a broader and more systemic sense. Furthermore, they demand integrative solutions that bring together, rather than divide, the people working in their traditional functional silos. For that reason, our dominant perspective throughout this book will be that of a general manager – whether that is the CEO of the corporation, the global business vice-president, the national subsidiary manager, or the frontline country product manager. By adopting the perspective of the transnational general manager, however, we

do not ignore the important and legitimate perspectives, interests, and influences of other key actors both inside and outside the company. We view the effects of these other key players from the perspective of an MNE general manager, however, and focus on understanding how they shape or influence the strategic, organizational, and operational decisions that the general manager must take.

Text, Cases, and Readings: How Will We Learn?

If the title, Transnational Management, describes the field of study and the content of the book, the subtitle, Text and Cases in Cross-Border Management, provides clues to the teaching philosophy and materials that will be employed. Because this book may be different in structure and format from some others you have used, it’s probably worth spending a little time describing the classroom materials you will find between these covers and the pedagogic philosophy we followed in assembling them. As the previous paragraphs have suggested, taking on the responsibility of the

general manager in a twenty-first century MNE may well represent the most complex task to which a manager could be assigned. So creating a course that prepares one for such a role requires some creativity. It’s clear that the challenges cannot be reduced, for example, to a few global strategy recipes, a standardized international organization chart, or a simple check list of the six most important things a country manager must do to succeed. But neither is it helpful to suggest that everything is too complex to reduce to

specifics. In the chapters that follow, we will seek a middle way that presents some

4 Introduction

broad concepts, frameworks, and principles that allow some generalization and conceptualization of the issues. But we will also provide material that allows students to take these generalized models for a “test drive” to apply, adapt, enhance, and embed the ideas in a practice-based, decision-oriented approach that is both grounded and flexible.

The Structure The book is structured into three parts, which are divided into eight integrated text chapters, each representing a topic that builds on the chapters that precede it. The basic outline is shown in Figure 1. Part I of the book consists of three chapters that focus on the strategic imperatives

facing the MNE.

• In Chapter 1, we will examine the internal strategic motivations that drive, attract, or compel MNEs to expand offshore.

• Chapter 2 helps us understand the complex and often conflicting external envir- onmental forces that shape the strategy of the MNE as it expands abroad.

Part 2. The Organizational

Challenge

Part 1. The Strategic Imperatives Chapter 2.

Understanding the International Context

Chapter 1. Expanding Abroad

Chapter 3. Developing Transnational

Strategies

Chapter 4. Developing a Transnational

Organization Chapter 5.

Creating Worldwide Innovation and Learning

Chapter 6. Engaging in Cross-Border

Collaboration

Chapter 7. Building New Management

Capabilities

Chapter 8. Shaping the Transnational's

Future

Part 3. The Managerial

Implications

Figure 1 The structure of the book

Text, Cases, and Readings: How Will We Learn? 5

• Chapter 3 explores how MNEs resolve the tension between their internal motiv- ations and the external forces to develop a strategy based on building layers of competitive advantage.

Part II has three chapters that examine the organizational challenges flowing from the strategic imperatives.

• Chapter 4 examines the task of building an organization able to deliver the multilayered strategic capabilities required by a multidimensional transnational strategy.

• Chapter 5 focuses on the critical strategic task of developing the capability to advance and diffuse innovations on a worldwide platform.

• In Chapter 6, we explore the growing organizational challenge of managing collaborations across corporate boundaries.

Part III has two chapters focusing on the managerial implications of both the strategic imperatives and the organizational challenges we have identified.

• Chapter 7 allows us to explore the managerial roles and responsibilities required to build the capabilities MNEs need to successfully implement their strategies.

• Chapter 8 considers the evolving roles and responsibilities of transnational organ- izations that managers need to develop to negotiate the current and future global political economy.

The Learning Materials To help us through this big agenda, the book is constructed around three major learning resources: the eight text chapters described above, 28 case studies relevant to the chapter topics, and a portfolio of recommended practitioner and academic supplemental readings. Let’s briefly explain how each of these components contrib- ute to the overall learning. At the end of each chapter, there is a list of recommended readings drawn

primarily from practitioner-oriented journals such as Harvard Business Review and the McKinsey Quarterly. These readings have been carefully selected to provide supplemental perspectives to those presented in the text chapters. Some are classic articles whose wisdom has endured over time, while others are contemporary and reflect the latest thinking on the topic being addressed. And for those interested in exploring the theoretical underpinnings of the arguments presented, the footnotes in each chapter provide a link to relevant academic articles. In all instances, the objective of these supplemental readings is to expand and enrich the mental maps being created as we progress on this voyage of discovery. But, as we have emphasized, because the challenges facing the modern MNE

represent perhaps the most complex environment in which a manager can operate, no amount of concepts, models, theories, or frameworks can capture the task. We believe that the most powerful way to allow students to enter this complexity is to employ real-life cases that require the complexity to be unraveled and decisions to be made. Most of those in this book provide the reader not only with data on the

6 Introduction

macro business and company context, but also with detailed information about the key actors and what they bring to the situation: their personal motivations, their strengths and weaknesses, their roles and responsibilities. In many instances, videos and follow-up cases lead to further insight. Although a few of the cases have been disguised, all of them are real, and almost

all have been prepared on the basis of detailed field research. While the vast majority of them document current best practice or illustrate managers facing contemporary challenges, we have also included a handful of classic cases, enduring favorites that have been shown to be effective in illustrating persistent issues in cross-border management. For those who are less familiar with the use of cases in a classroom setting, it is

worthwhile emphasizing that the purpose of this classroom material is to present you with the kinds of important challenges a manager might encounter only once a year, once in a decade, or even once in a career. They present you with an opportunity to go through the same process as the case protagonist – sorting through the information, analyzing the situation, evaluating the options, deciding on action, thinking through the implementation steps required to bring about the necessary change, and then convincing your colleagues of the wisdom of your approach. Repeating this process a couple of dozen times through the course can significantly increase one’s ability to translate abstract concepts and general theories into real on-the-ground practice.

Getting Started

But enough overview, background, and analysis; it’s time to launch headlong into this fascinating and exciting new world of transnational management. So let’s begin our voyage to explore the challenges and opportunities of those who have the responsibility for the strategy and operations of organizations that stretch across the barriers of distance, language, and culture. It should be quite a trip.

Getting Started 7

Part I

The Strategic Imperatives

1 Expanding Abroad Motivations, Means, and Mentalities

This chapter looks at a number of important questions that companies must resolve before taking the leap to operate outside their home environment. What market opportunities, sourcing advantages, or strategic imperatives provide the motivation for their international expansion? By what means will they expand their overseas presence – through modes such as exports, licensing, joint ventures, wholly owned subsidiaries, or some other means? And how will the management mentalities – their embedded attitudes, assumptions, and beliefs – that they bring to their international ventures affect their chances of success? Before exploring these import- ant questions, however, we first need to develop a definition of this entity – the multinational enterprise (MNE) – that we plan to study and develop some sense of its size and importance in the global economy.

This book focuses on the management challenges associated with developing the strategies, building the organizations, and managing the operations of companies whose activities stretch across national boundaries. Clearly, operating in an international rather than a domestic arena presents managers with many new opportunities. Having worldwide operations not only gives a company access to new markets and low-cost resources, it also opens up new sources of information and knowledge, and broadens the options for strategic moves the company might make in competing with its domestic and international rivals. However, with all these new opportunities come the challenges of managing strategy, organization, and operations that are innately more complex, diverse, and uncertain. Our starting point is to focus on the dominant vehicle of internationalization, the

MNE, and briefly review its role and influence in the global economy.1 Only after understanding the origins, interests, and objectives of this key actor will we be in a position to explore the strategies it pursues and the organization it develops to achieve them.

1 Such entities are referred to variously – and often interchangeably – as multinational, international, and global enterprises. (Note that we use the term “enterprise” rather than “corporation” because some of the cross-border entities we will examine are non-profit organizations whose strategies and operations are every bit as complex as their corporate brethren’s.) At the end of this chapter, we assign each of those terms – multinational, international, and global – specific meanings, but throughout the book, we adopt the widely used MNE abbreviation in a broader, more general, sense to refer to all enterprises whose operations extend across national borders.

In this chapter, we introduce the MNE by defining its key characteristics, discuss- ing its origins, interests, and objectives, and reviewing its major role and influence in the global economy. We then describe the motivations that drive these companies abroad, the means they adopt to expand internationally, and the mentalities of management that shape the strategies MNEs pursue and the organizations they develop to achieve them.

The MNE: Definition, Scope, and Influence

An economic historian could trace the origins of international business back thousands of years to the sea-faring traders of Greece and Egypt,2 through the merchant traders of medieval Venice, and the great British and Dutch trading companies of the seventeenth and eighteenth centuries. By the nineteenth century, the newly emerged capitalists in industrialized Europe began investing in the less developed areas of the world (including the United States) but particularly within the vast empires held by Britain, France, Holland, and Germany.

Definition In terms of the working definition we use, few if any of these entities through history could be called true MNEs. Most early traders would be excluded by our first qualification, which requires that an MNE have substantial direct investment in foreign countries, not just the trading relationships of an import–export business. And even most of the companies that had established international operations in the nineteenth century would be excluded by our second criterion, which requires that they be engaged in the active management of these offshore assets rather than simply holding them in a passive investment portfolio. Thus, though companies that source their raw materials offshore, license their

technologies abroad, export their products into foreign markets, or even hold minor equity positions in overseas ventures without any management involvement may regard themselves as “international,” by our definition they are not true MNEs unless they have substantial direct investment in foreign countries and actively manage and regard those operations as integral parts of the company, both strategically and organizationally.

Scope According to our definition, the MNE is a very recent phenomenon, with the vast majority developing only in the post–World War II years. However, the motivations for international expansion and the nature of MNEs’ offshore activities have evolved significantly over this relatively short period, and we will explore some of these changes later in this chapter.

2 See Karl Moore and David Lewis, The Origins of Globalization (New York: Routledge, 2009).

12 Expanding Abroad

It is interesting to observe how the United Nations (UN) has changed its definition of the MNE as these companies have grown in size and importance.3 In 1973, it defined such an enterprise as one “which controls assets, factories, mines, sales offices, and the like in two or more countries.” By 1984, it had changed the definition to an enterprise (a) comprising entities in two or more countries, regard- less of the legal form and fields of activity of those entities; (b) which operates under a system of decision making permitting coherent policies and a common strategy through one or more decision-making centers; and (c) in which the entities are so linked, by ownership or otherwise, that one or more of them may be able to exercise a significant influence over the activities of the others, in particular to share knowledge, resources, and responsibilities. In essence, the changing definition highlights the importance of both strategic

and organizational integration, and thereby the active, coordinated management of operations located in different countries, as the key differentiating characteristic of an MNE. The resources committed to those units can take the form of skilled people or research equipment just as easily as plants and machinery or computer hardware. What really differentiates the MNE is that it creates an internal organization to carry out key cross-border tasks and transactions internally rather than depending on trade through the external markets, just as the companies in Table 1.1 do. This more recent UN definition also expands earlier assumptions of traditional ownership patterns to encompass a more varied set of financial, legal, and contractual rela- tionships with different foreign affiliates. With this understanding, our definition of MNEs includes Apple, BP, and Honda Motors, but also Intercontinental Hotels, Deloitte Consulting, and McDonald’s.

MNE Influence in the Global Economy Most frequent international business travelers have had an experience like the following: She arrives on her Singapore Airlines flight, rents a Toyota at Hertz, and drives to the downtown Marriott Hotel. In her room, she flips on the LG television and absentmindedly gazes out at neon signs flashing “Pepsi,” “Samsung,” and “Lexus.” The latest episode of Modern Family is flickering on the screen when room service delivers dinner along with the bottle of Perrier she ordered. All of a sudden, a feeling of disorientation engulfs her. Is she in Sydney, Shanghai, Sao Paulo, or San Francisco? Her surroundings and points of reference over the past few hours have provided few clues. Such experiences, more than any data, provide the best indication of the enor-

mous influence of MNEs in the global economy. As the cases in this book show, few sectors of the economy and few firms – not even those that are purely domestic in their operations – are free from this pervasive influence. Worldwide, there are over

3 The generic term for companies operating across national borders in most UN studies is transnational corporation (TNC). Because we use that term very specifically, we continue to define the general form of organizations with international operations as MNEs.

The MNE: Definition, Scope, and Influence 13

130million firms.4 While most of these are small, and focused on their home country, others are extremely large, with a global focus. In 2015, MNEs’ foreign affiliates generated value-added of approximately $8 trillion, more than one-tenth of global GDP and 30% of world exports.

Table 1.1 Selected indicators of FDI and international production, 2010–2015

Value at current prices (billions of dollars)

Annual growth rate or change on return (%)

Item 2010 2014 2015 2010 2014 2015

FDI inflows 1,244 1,277 1,762 4.9 –10.5 38.0 FDI outflows 1,323 1,318 1,474 13.1 0.6 11.8 FDI inward stock 19,141 25,113 24,983 6.6 2.4 –0.5 FDI outward stock 20,408 24,810 25,045 6.3 0.6 0.9 Income on inward FDI 1,137 1,595a 1,404a 20.3 4.5 –12.0 Rate of return on inward FDIb 7.3 6.7 6.0 0.3 0.2 –0.7 Income on outward FDI 1,251b 1,509a 1,351a 20.6 4.3 –10.5 Rate of return on outward FDIb 7.2 6.3 5.6 0.3 0.2 –0.7 Cross-border M&As 339 432 721 35.7 64.7 66.8 Sales of foreign affiliates 32,960c 34,149d 36,668d 9.1 7.2 7.4 Value-added (product) of foreign affiliates

6,636c 7,419d 7,903d 8.3 5.5 6.5

Total assets of foreign affiliates 56,998c 101,254d 105,778d 6.3 5.8 4.5 Exports of foreign affiliates 6,239e 7,688e 7,803e 18.6 2.9 1.5 Employment by foreign affiliates (thousands)

68,218c 76,821d 79,505d 2.3 6.3 3.5

Source: UNCTAD, World Investment Report 2016. a Based on data from 174 countries for income on FDI and 143 countries for income on outward FDI in 2015, in both cases representing more than 90% of global inward and outward stocks.

b Calculated only for countries with both FDI income and stock data. c Data for 2010 is estimated based on a fixed-effects panel regression of each variable against outward stock and a lagged dependent variable for the period 1980–2008.

d Data for 2014 and 2015 are estimated based on a fixed-effects panel regression of each variable against outward stock and a lagged dependent variable for the period 1980–2012.

e The share of exports of foreign affiliates in world exports in 1998 (33.3%) was applied to obtain values.

Note: Not included in this table is the value of worldwide sales by foreign affiliates associated with their parent firms through non-equity relationships and of the sales of the parent firms themselves. Worldwide sales, gross product, total assets, exports, and employment of foreign affiliates are sometimes estimated.

4 The World Investment Report 2016 published by the United Nations Conference on Trade and Development (UNCTAD) references the Bureau van Dijk’s Orbis database. This database is the largest and most widely used database of its kind, covering 136million active companies (at the time of extraction, in November 2015) across more than 200 countries and territories, and containing firm- level data sourced from national business registries, chambers of commerce, and various other official sources (UNCTAD, World Investment Report 2016, p. 145).

14 Expanding Abroad

Not all MNEs are large, but most large companies in the world are MNEs. Indeed, the largest 100 MNEs, excluding those in banking and finance, accounted for $12.9 trillion of total worldwide assets in 2015, of which $7.9 trillion was located outside their respective home countries. Moreover, as Table 1.1 shows, international production is expanding, with sales,

employment, and assets of foreign affiliates all increasing. The rate of return earned by MNEs on foreign direct investment (FDI) was 5.6% in 2015. However, the importance of the developing and transition economies is rising. As

Table 1.2 shows, while the total worldwide assets of the 100 largest MNEs (or TNCs as the UN refers to them) decreased by 1.1% to $13,231 billion between 2013 and 2014, in the same period, the total assets of the 100 largest TNCs from developing and transition economies increased by 7.4% to $5,948 billion. In addition, while the total employment of the 100 largest TNCs worldwide decreased by 3.9% to 15,816,000 between 2013 and 2014, in the same period, the total employment of the 100 largest TNCs from developing and transition economies increased by 0.8% to 11,534,000. A different perspective on the size and potential impact of MNEs is provided in

Table 1.3, which compares the overall revenues of several MNEs with the gross

Table 1.2 Internationalization statistics of the 100 largest non-financial MNEs worldwide and from developing and transition economies (Billions of dollars, thousands of employees, and percent)

100 largest MNEs worldwide

100 largest MNEs from developing and transition economies

2013 2014 2015a 2013 2014

Assets Foreign 8,198 8,341 7,933 1,556 1,731 Total 13,382 13,231 12,854 5,540 5,948

Foreign as % of total 61 63 62 28 29

Sales Foreign 6,078 6,011 5,115 2,003 2,135 Total 9,292 9,042 7,863 4,170 4,295

Foreign as % of total 65 66 65 48 50

Employment Foreign 9,555 9,375 9,973 4,083 4,173 Total 16,461 15,816 17,304 11,447 11,534

Foreign as % of total 58 59 58 36 36

Source: UNCTAD, World Investment Report 2016. Note: Data refer to fiscal year results reported between April 1 of the base year to March 31 of the following year. 2015 data are unavailable for the 100 largest MNEs from developing and transi- tion economies due to lengthier reporting deadlines in these economies. a Preliminary results.

The MNE: Definition, Scope, and Influence 15

domestic products (GDPs) of selected countries. By comparing company revenues and country GDPs, it is clear that some of the world’s largest MNEs are equivalent in their economic importance to medium-sized economies such as Nigeria, South Africa, and Denmark, and considerably more economically important than smaller or less developed economies such as Jamaica, Moldova, or Barbados. They have considerable influence on the global economy, employ a high percentage of busi- ness graduates, and pose the most complex strategic and organizational challenges for their managers. For the same reasons, they provide the focus for much of our attention in this book.

The Motivations: Pushes and Pulls to Internationalize

What motivates companies to expand their operations internationally?5 Although occasionally the motives may be entirely idiosyncratic, such as the desire of the CEO

Table 1.3 Comparison of top MNEs and selected countries: 2016

Companya Revenues (millions USD)

Company rank Countryb

GDP (current millions USD)

Country GDP rank

Walmart 482,130 1 United States 18,036,648 1 State Gridc 329,601 2 China 11,007,721 2 China National Petroleum 299,271 3 Japan 4,123,258 3 Sinopec Group 294,344 4 Germany 3,363,447 4 Royal Dutch Shell 272,156 5 Nigeria 481,066 23 ExxonMobil 246,204 6 South Africa 314,572 31 Volkswagen 236,600 7 Denmark 295,091 35 Toyota Motor 236,592 8 Finland 231,950 42 Apple 233,715 9 Hungary 121,715 55 BP 225,982 10 Jamaica 14,262 112 Samsung Electronics 177,440 13 Moldova 6,568 142

Note: This table is illustrative of the economic importance of some of the world’s largest MNEs. One has to be cautious when comparing the above company and country numbers. That is because country GDPs and company revenues are not perfectly comparable while country value-added and company value-added are. A country’s GDP represents its value-added whereas a company’s revenue is typically higher than its value- added. Thus from a comparison point of view, the above company numbers may be somewhat inflated relative to the country numbers. a Data are from the Fortune Global 500 list of the world’s largest corporation in 2016 by revenue http://beta .fortune.com/global500.

b Data are from World Development Indicators published by the World Bank http://data.worldbank.org/ indicator/NY.GDP.MKTP.CD?year_high_desc=true.

c State Grid Corporation of China, established in 2002, is the world’s largest utility company.

5 In “Internalisation thinking: from multinational enterprise to the global factory,” internalization thinking is traced from its inception, by Coase, through its application to multinational enterprises

16 Expanding Abroad

to spend time in Mexico or link to old family ties in Europe, an extensive body of research suggests some more systematic patterns.

Traditional Motivations Among the earliest motivations that drove companies to invest abroad was the need to secure key supplies. Aluminum producers needed to ensure their supply of bauxite, tire companies went abroad to develop rubber plantations, and oil com- panies wanted to open new fields in Canada, the Middle East, and Venezuela. By the early part of the nineteenth century, Standard Oil, Alcoa, Goodyear, Anaconda Copper, and International Nickel were among the largest of the emerging MNEs. Another strong trigger for internationalization could be described as market-

seeking behavior. This motivation was particularly strong for companies that had some intrinsic advantage, typically related to their technology or brand recognition, which gave them a competitive advantage in offshore markets. Their initial moves were often opportunistic, frequently originating with an unsolicited export order. However, many companies eventually realized that additional sales enabled them to exploit economies of scale and scope, thereby providing a source of competitive advantage over their domestic rivals. This market seeking was a particularly strong motive for some European multinationals whose small home markets were insuffi- cient to support the volume-intensive manufacturing processes that were sweeping through industries from food and tobacco to chemicals and automobiles. Companies such as Philips, Volkswagen, and Unilever expanded internationally primarily in search of new markets. Another traditional and important trigger of internationalization was the desire

to access low-cost factors of production. Particularly as tariff barriers declined in the 1960s, the United States and many European countries, for which labor represented a major cost, found that their products were at a competitive disadvantage com- pared with imports. In response, a number of companies in clothing, electronics, household appliances, watch-making, and other such industries established offshore

and to the global factory. The general principles governing the internalization of markets are revisited and the focus on innovation, the dynamics of internalization, and its application to newer structures of firms such as the global factory are emphasized.

P. J. Buckley, “Internalisation thinking: from the multinational enterprise to the global factory,” International Business Review, 18:3 (2009), 224–35.

“Uncertainty, imitation, and plant location: Japanese multinational corporations, 1990–1996,” uses neoinstitutional theory and research on political institutions to explain organizational entry into new geographic markets. It extends neoinstitutional theory’s proposition that prior decisions and actions by other organizations provide legitimization and information to a decision marked by uncertainty, showing that this effect holds when the uncertainty comes from a firm’s lack of experience in a market but not when the uncertainty derives from the structure of a market’s policymaking apparatus.

W. J. Henisz and A. Delios, “Uncertainty, imitation, and plant location: Japanese multinational corporations, 1990–1996,” Administrative Science Quarterly, 46:3 (2001), 443–75.

The Motivations: Pushes and Pulls to Internationalize 17

sourcing locations to produce components or even complete product lines. For example, General Electric (GE) moved production from its lamp plant in Virginia to China and GE Healthcare, one of GE’s most strategic businesses, invested in three world-class plants in India and more recently started manufacturing high-end computed tomography (CT) imaging systems there for India and the world. Labor was not the only productive factor that could be sourced more economic-

ally overseas. For example, the availability of lower cost capital (often through a government investment subsidy) also became a strong force for internationalization. It was the provision of such government financial incentives that induced General Motors to expand its basic assembly operation in Brazil into a fully integrated operation that is now the company’s fourth most important R&D facility worldwide. These three motives were the main traditional driving force behind the overseas

expansion of MNEs. The ways in which these motives interacted to push com- panies – particularly those from the United States – to become MNEs are captured in Vernon’s well-known product cycle theory.6

This theory suggests that the starting point for an internationalization process is typically an innovation that a company creates in its home country. In the first phase of exploiting the development, the company – let’s assume it is in the United States – builds production facilities in its home market not only because this is where its main customer base is located but also because of the need to maintain close linkages between research and production in this phase of its development cycle. In this early stage, some demand also may be created in other developed countries – in European countries, for example – where consumer needs and market developments are similar to those of the United States. These requirements normally would be met with home production, thereby generating exports for the United States. During this pre-MNE stage, firms would typically establish an export unit within

the home office, to oversee the growing export levels. Committing to this sort of organizational structure would in turn typically lead to stronger performance than would treating exports simply as a part of the domestic business.7

As the product matures and production processes become standardized, the company enters a new stage. By this time, demand in the European countries may have become quite sizable, and export sales, originally a marginal side benefit, have become an important part of the revenues from the new business. Furthermore, competitors probably begin to see the growing demand for the new product as a potential opportunity to establish themselves in the markets served by exports. To prevent or counteract such competition and to meet the foreign demand more effectively, the innovating company typically sets up production facilities in the importing countries, thereby making the transition from being an exporter to becoming a true MNE.

6 Raymond Vernon, “International investment and international trade in the product cycle,” Quarterly Journal of Economics, May (1966), 190–207.

7 PaulW. Beamish, Lambros Karavis, Anthony Goerzen, and Christopher Lane, “The relationship between organizational structure and export performance,” Management International Review, 39 (1999), 37–54.

18 Expanding Abroad

Finally, in the third stage, the product becomes highly standardized, and many competitors enter the business. Competition focuses on price and, therefore, on cost. This trend activates the resource-seeking motive, and the company moves produc- tion to low-wage, developing countries to meet the demands of its customers in the developed markets at a lower cost. In this final phase, the developing countries may become net exporters of the product while the developed countries become net importers. Although the product cycle theory provided a useful way to describe much of the

internationalization of the postwar decades,8 by the 1980s, its explanatory power was beginning to wane, as Vernon himself was quick to point out. As the inter- national business environment became increasingly complex and sophisticated, companies developed a much richer rationale for their worldwide operations.

Emerging Motivations Once MNEs had established international sales and production operations, their perceptions and strategic motivations gradually changed.9 Initially, the typical attitude was that the foreign operations were mere strategic and organizational appendages to the domestic business and should be managed opportunistically. Gradually, however, managers began to think about their strategy in a more integrated, worldwide sense. In this process, the forces that originally triggered their expansion overseas often became secondary to a new set of motivations that underlay their emerging global strategies. The first such set of forces was the increasing scale economies, ballooning R&D

investments, and shortening product life cycles that transformed many industries into global rather than national structures and made a worldwide scope of activities not a matter of choice but an essential prerequisite for companies to survive in those businesses. These forces are described in detail in the next chapter. A second factor that often became critical to a company’s international strategy –

though it was rarely the original motivating trigger – was its global scanning and learning capability.10 A company drawn offshore to secure supplies of raw materials

8 The record of international expansion of countries in the post-World War II era is quite consistent with the pattern suggested by the product cycle theory.

9 “The governance of global value chains” article builds a theoretical framework to help explain governance patterns in global value chains. It draws on transaction costs economics, production networks, technological capability, and firm-level learning to identify three variables that play a large role in determining how global value chains are governed and change. These are: (1) the complexity of transactions, (2) the ability to codify transactions, and (3) the capabilities in the supply base. The theory generates five types of global value-chain governance – hierarchy, captive, relational, modular, and market – which range from high to low levels of explicit coordination and power asymmetry. The article highlights the dynamic and overlapping nature of global value-chain governance through four brief industry case studies: bicycles, apparel, horticulture, and electronics.

G. Gereffi, J. Humphrey, and T. Sturgeon, “The governance of global value chains,” Review of International Political Economy, 12:1 (2005), 78–104.

10 This motivation is highlighted by Raymond Vernon in “Gone are the cash cows of yesteryear,” Harvard Business Review, November–December (1980), 150–5.

The Motivations: Pushes and Pulls to Internationalize 19

was more likely to become aware of alternative, low-cost production sources around the globe; a company tempted abroad by market opportunities was often exposed to new technologies or market needs that stimulated innovative product development. The very nature of an MNE’s worldwide presence gave it a huge informational advantage that could result in it locating more efficient sources or more advanced product and process technologies. Thus a company whose international strategy was triggered by a technological or marketing advantage could enhance that advantage through the scanning and learning potential inherent in its worldwide network of operations. (This has become an increasingly important strategic advan- tage that we will explore in detail in Chapter 5.) A third benefit that soon became evident was that being a multinational rather

than a national company brought important advantages of competitive positioning. Certainly, the most controversial of the many global competitive strategic actions taken by MNEs in recent years have been those based on cross-subsidization of markets. For example, a Chinese energy company, such as China Petroleum and Chemical Group (Sinopec), could challenge a national company in the United States by subsidizing its US losses with funds from its profitable Middle East or South American operations. If the US company did not have strong positions in the Chinese company’s key

Middle East and South American markets, its competitive response could only be to defend its home market positions – typically by seeking government intervention or matching or offsetting the Chinese challenger’s competitive price reductions. Recognition of these competitive implications of multicountry operations led some companies to change the criteria for their international investment decisions to reflect not only market attractiveness or cost-efficiency choices but also the lever- age such investments provided over competitors.11

Although for the purposes of analysis – and to reflect some sense of historical development – the motives behind the expansion of MNEs have been reduced to a few distinct categories, it should be clear that companies were rarely driven by a single motivating force. More adaptable companies soon learned how to capitalize on the potential advantages available from their international operations – ensuring critical supplies, entering new markets, tapping low-cost factors of production, leveraging their global information access, and capitalizing on the competitive advantage of their multiple market positions – and began to use these strengths to play a new strategic game that we will describe in later chapters as global chess.

The Means of Internationalization: Prerequisites and Processes

Having explored why an aspiring MNE wants to expand abroad (i.e., its motivation), we must now understand how it does so by exploring the means of

11 These competitive aspects of global operations are discussed in detail in Chapter 3.

20 Expanding Abroad

internationalization. Beyond the desire to expand offshore, a company must possess certain competencies – attributes that we describe as prerequisites – if it is to succeed in overseas markets. It must then be able to implement its desire to expand abroad through a series of decisions and commitments that define the international- ization process.

Prerequisites for Internationalization In each national market, a foreign company suffers from some disadvantages in comparison with local competitors, at least initially. Because of their greater famil- iarity with the national culture, industry structure, government requirements, and other aspects of doing business in that country, domestic companies have a huge natural advantage. Their existing relationships with relevant customers, suppliers, regulators, and so on provide additional advantages that the foreign company must either match or counteract with some unique strategic capability. Most often, this countervailing strategic advantage comes from the MNE’s superior knowledge or skills, which typically take the form of advanced technological expertise or specific marketing competencies. At other times, scale economies in R&D, production, or some other part of the value chain become the main source of the MNE’s advantage over domestic firms. It is important to note, however, that the MNE cannot expect to succeed in the international environment unless it has some distinctive competency to overcome the liability of its foreignness.12

Such knowledge or scale-based strategic advantages are, by themselves, insuffi- cient to justify the internationalization of operations. Often with much less effort, a company could sell or license its technology to foreign producers, franchise its brand name internationally, or sell its products abroad through general trading companies or local distributors, without having to set up its own offshore oper- ations. This approach was explicitly adopted by Dunkin Donuts, which decided to proactively and aggressively franchise its brand domestically (in the United States) as well as internationally rather than solely set up its own domestic and inter- national restaurants. Dunkin’s founder, Bill Rosenberg, was so enamored by the franchising concept that he founded the International Franchise Association (IFA) in 1960. He believed that franchising is a wonderful way to expand further and faster. By 2016, Dunkin had more than 11,000 restaurants worldwide in 42 countries, around 8,000 of which were in the United States and 3,000 abroad. Approximately 99% of these restaurants were franchised operations. Dunkin claimed to serve more than 3million customers a day! One may argue that Dunkin could not have grown domestically and internationally as fast were it not for the franchising strategy that it followed.

12 The need for such strategic advantages for a company to become an MNE is highlighted by the market imperfections theory of MNEs. For a comprehensive review of this theory, see Richard E. Caves, Multinational Enterprise and Economic Analysis, 3rd edn (Cambridge: Cambridge University Press, 2007).

The Means of Internationalization: Prerequisites and Processes 21

The other precondition for a company to become an MNE therefore is that it must have the organizational capability to leverage its strategic assets more effectively through its own subsidiaries than through contractual relations with outside parties. If superior knowledge is the main source of an MNE’s competitive advantage, for example, it must have an organizational system that provides better returns from extending and exploiting its knowledge through direct foreign operations than the return it could get by selling or licensing that knowledge.13

To summarize, three conditions must be met for the existence of an MNE. First, some foreign countries must offer certain location-specific advantages to provide the requisitemotivation for the company to invest there. Second, the company must have some strategic competencies or ownership-specific advantages to counteract the disadvantages of its relative unfamiliarity with foreign markets. Third, it must possess some organizational capabilities to achieve better returns from leveraging its strategic strengths internally rather than through external market mechanisms such as contracts or licenses.14 Understanding these prerequisites is important not only because they explain why MNEs exist but also, as we show in Chapter 3, because they help define the strategic options for competing in worldwide businesses.

The Process of Internationalization The process of developing these strategic and organizational attributes lies at the heart of the internationalization process through which a company builds its position in world markets.15 This process is rarely well thought out in advance,

13 The issue of organizational capability is the focus of what has come to be known as the internalization theory of MNEs. See AlanM. Rugman, “A new theory of the multinational enterprise: internationalization versus internalization,” Columbia Journal of World Business, Spring (1982), 54–61. For a more detailed exposition, see Peter J. Buckley and Mark Casson, The Future of the Multinational Enterprise (London: MacMillan, 1976).

14 These three conditions are highlighted in John Dunning’s eclectic theory. See JohnH. Dunning and SariannaM. Lundan, Multinational Enterprises and the Global Economy, 2nd edn (Cheltenham, UK: Edward Elgar, 2008).

15 In “International expansion through flexible replication,” Jonsson and Foss discuss how business organizations may expand internationally by replicating a part of their value chain, such as a sales and marketing format, in other countries. Based on a longitudinal in-depth study of Swedish home furnishing giant IKEA, they found that IKEA has developed organizational mechanisms that support an ongoing learning process aimed at frequent modification of the format for replication. They also observed that IKEA treats replication as hierarchical: lower level features (marketing efforts, pricing, etc.) are allowed to vary across IKEA stores in response to market-based learning, while higher level features (fundamental values, vision, etc.) are replicated in a uniform manner across stores, and change only very slowly (if at all) in response to learning (“flexible replication”). A. Jonsson and N. J. Foss, “International expansion through flexible replication: learning from the

internationalization experience of IKEA,” Journal of International Business Studies, 42:9 (2011), 1079–102. In “International diversification and firm performance: the S-curve hypothesis,” Lu and Beamish

propose a theoretical framework for the study of multinationality and performance, which includes both benefits and costs of geographic expansion over different phases of internationalization. They find a consistent horizontal S-shaped relationship between multinationality and performance.

22 Expanding Abroad

and it typically builds on a combination of rational analysis, opportunism, and pure luck. Nonetheless, it is still possible to discern some general patterns of behavior that firms typically follow. The most well-known model for internationalization was developed by two

Swedish academics based in Uppsala, who described foreign market entry as a learning process.16 The company makes an initial commitment of resources to the foreign market, and through this investment, it gains local market knowledge about customers, competitors, and regulatory conditions. On the basis of this market knowledge, the company is able to evaluate its current activities, the extent of its commitment to the market, and thus the opportunities for additional investment. It then makes a subsequent resource commitment, perhaps buying out its local distributor or investing in a local manufacturing plant, which allows it to develop additional market knowledge. Gradually, and through several cycles of investment, the company develops the necessary levels of local capability and market knowledge to become an effective competitor in the foreign country (see Figure 1.1). Whereas many companies internationalize in the incremental approach depicted

by the so-called Uppsala model, a great many do not.17 Some companies invest in or acquire local partners to shortcut the process of building up local market knowledge. For example, Wal-Mart entered the UK by buying the supermarket chain ASDA rather than developing its own stores. Others speed up this process even more by starting up as “born globals” (see next page for a definition of a “born global” company). For example, Facebook, the social networking firm founded in

Market knowledge

Market commitment Current activities

Commitment decisions

Figure 1.1 A learning model of internationalization Source: Johanson and Vahlne, 1977.

Further, firms investing more heavily in intangible assets, such as technology and advertising, achieved greater profitability gains from growth in FDI. JaneW. Lu and PaulW. Beamish, “International diversification and firm performance: the S-curve hypothesis,” Academy of Management Journal, 47:4 (2004), 598–609.

16 Jan Johanson and Jan-Erik Vahlne, “The internationalization process of the firm: a model of knowledge development and increasing foreign market commitments,” Journal of International Business Studies, 88 (1977), 23–32. Jan Johanson and Jan-Erik Vahlne, “The Uppsala internationalization process model revisited: from liability of foreignness to liability of outsidership,” Journal of International Business Studies, 40 (2009), 1411–31.

17 Jonathan Calof and PaulW. Beamish, “Adapting to foreign markets: explaining internationalization,” International Business Review, 4 (1995), 115–31.

The Means of Internationalization: Prerequisites and Processes 23

2004, became global at surprising speed because it was started as an internet company. By 2016, Facebook had around 1.79 billion monthly active users (MAUs) and around 1.18 billion daily active users (DAUs) and was available in more than 90 different languages. Its millions of users and thousands of advertisers and developers are managed from offices or data centers in over 30 countries. Cases such as these highlight the complexity of the decisions MNEs face in entering a foreign market. One important set of factors is the assimilation of local market knowledge by

the subsidiary unit, as suggested by the Uppsala model. But other, equally important factors to the MNE include its overall level of commitment to the foreign market in question, the required level of control of foreign operations, and the timing of its entry. To help make sense of these different factors, it is useful to think of the different modes of operating overseas in terms of two factors: the level of market commitment made and the level of control needed (see Figure 1.2). Some companies internationalize by gradually moving up the scale, from

exporting through joint venturing to direct foreign investment. Others, such as Wal-Mart, prefer to move straight to the high-commitment, high-control mode of operating, in part because they are entering mature markets in which it would be very difficult to build a business from nothing. Still others choose to adopt a low-commitment, low-control mode, such as some “born global” companies. “Born globals” establish significant international operations at or near their

Figure 1.2 Approaches to foreign market entry Derived from Johanson and Vahlne, 1977.

24 Expanding Abroad

founding. Whether this is due to their internal orientation,18 or the need to move quickly due to the nature of their product or services, such firms do not take such an incremental approach. One of the most well-known “born globals” of our time is Google. Google was

able to make this approach work because it started as an online search company whose users could access its web-based search engine from nearly any country in the world without Google’s brick-and-mortar investment in that country. To be clear, none of these approaches is necessarily right or wrong, but they should be consistent with the overall strategic intentions and motivations of the MNE. Similarly, not all MNEs are large firms. By definition, most large MNEs started out

small. Yet many small- and medium-sized enterprises (SMEs) retain such a size, while still being MNEs in their own right. Other SMEs, observing a positive impact on performance as a consequence of their FDI activity, will grow.19

The Evolving Mentality: International to Transnational

Even from this brief description of the changing motivations for and means of internationalization, it should be clear that a gradual evolution has occurred in the strategic role that foreign operations play in emerging MNEs.20 We can categorize this evolutionary pattern into four stages that reflect the way in which management thinking has developed over time as changes have occurred in both the international business environment and the MNE as a unique corporate form. Although such a classification is necessarily generalized and somewhat arbitrary,

it enables us to achieve two objectives. First, it highlights that, for most MNEs, the objectives that initially induced management to go overseas evolve into a very different set of motivations over time, thereby progressively changing management attitudes and actions. Second, such a classification provides a specific language

18 Jane Lu and PaulW. Beamish, “Internationalization and performance of SMEs,” Strategic Management Journal, 22 (2001), 565–86.

19 In his Ivey Business Journal article entitled “Growing big by targeting small” Wunker (2012) argues that leaders of internationalizing firms are typically trained to focus on growing their companies in established, large, attractive markets. However, some of the greatest sources of firm growth arise from new markets that start out as small footholds. In support he shows that eight of the ten most valuable US companies started by serving very small new markets that they developed over time. And that following this strategy they grew with their markets to become giants.

20 In “Home-region orientation in international expansion strategies,” Banalieva and Dhanaraj draw on internalization theory to suggest that technological advantage and institutional diversity determine firms’ home-region orientation (HRO), and posit a simultaneous relationship between HRO and performance. They apply insights from the firm heterogeneity literature of international trade to explain the influence of technology on HRO. They find a negative and non-linear impact of technological advantage on HRO driven by increasing returns logic, and a negative impact of institutional diversity on HRO driven by search and deliberation costs. E. R. Banalieva and C. Dhanaraj, “Home-region orientation in international expansion strategies,”

Journal of International Business Studies, 44:2 (2013), 89–116.

The Evolving Mentality: International to Transnational 25

system that we use throughout this book to describe the very different strategic approaches adopted by various MNEs.21

International Mentality In the earliest stages of internationalization, many MNE managers tend to think of the company’s overseas operations as distant outposts whose main role is to support the domestic parent company in different ways, such as contributing incremental sales to the domestic manufacturing operations. We label this approach the inter- national strategic mentality. The international terminology derives directly from the international product cycle

theory, which reflects many of the assumptions implicit in this approach. Products are developed for the domestic market and only subsequently sold abroad; technology and other sources of knowledge are transferred from the parent company to the overseas operators; and offshore manufacturing represents a means to protect the company’s home market. Companies with this mentality regard themselves funda- mentally as domestic with some foreign appendages. Managers assigned to overseas operations may be selected because they happen to know a foreign language or have previously lived abroad. Decisions related to the foreign operations tend to be made in an opportunistic or ad hoc manner. Many firms at this stage will prefer to only enter countries where there is low “psychic distance” between it and the home market.

Multinational Mentality The exposure of the organization to foreign environments and the growing import- ance of sales and profits from these sources gradually convince managers that international activities can provide opportunities of more than marginal significance. Increasingly, they also realize that to leverage those opportunities, they must do more than ship out old equipment, technology, or product lines that had been developed for the home market. The success of local competitors in the foreign markets and the demands of host governments often accelerate the learning of companies that would otherwise retain an unresponsive, international mentality for too long. A multinational strategic mentality develops as managers begin to recognize and

emphasize the differences among national markets and operating environments. Companies with this mentality adopt a more flexible approach to their international operations by modifying their products, strategies, and even management practices country by country. As they develop national companies that are increasingly sensitive and responsive to their local environments, these companies undertake a strategic approach that is literally multinational: their strategy is built on the foundation of the multiple, nationally responsive strategies of the company’s worldwide subsidiaries.

21 The terms international, multinational, global, and transnational have been used very differently – and sometimes interchangeably – by various writers. We want to give each term a specific and different meaning and ask that readers put aside their previous usage of the terms – at least for the duration of our exposition.

26 Expanding Abroad

In companies operating with such a multinational mentality, managers of foreign operations tend to be highly independent entrepreneurs, often nationals of the host country. Using their local market knowledge and the parent company’s willingness to invest in these growing opportunities, these entrepreneurial country managers often can build significant local growth and considerable independence from headquarters.

Global Mentality Although the multinational mentality typically results in very responsive marketing approaches in the different national markets, it also gives rise to an inefficient manufacturing infrastructure within the company. Plants are built more to provide local marketing advantages or improve political relations than to maximize pro- duction efficiency. Similarly, the proliferation of products designed to meet local needs contributes to a general loss of efficiency in design, production, logistics, distribution, and other functional tasks. In an operating environment of improving transportation and communication

facilities and falling trade barriers, some companies adopt a very different strategic approach in their international operations. These companies think in terms of creating products for a world market and manufacturing them on a global scale in a few highly efficient plants, often at the corporate center. We define this approach as a classic global strategy mentality, because it views

the world, not individual national markets, as its basic unit of analysis. The underlying assumption is that national tastes and preferences are more similar than different or that they can be made similar by providing customers with standardized products at adequate cost and with quality advantages over those national varieties they know. Managers with this global strategic approach subscribe to Levitt’s provocative argument in the mid-1980s that the future belongs to companies that make and sell “the same thing, the same way, everywhere.”22

This strategic approach requires considerably more central coordination and control than the others and is typically associated with an organizational structure in which various product or business managers have worldwide responsibility. In such com- panies, research and development and manufacturing activities are typically managed from the headquarters, and most strategic decisions also take place at the center.

Transnational Mentality In the closing decades of the twentieth century, many of these global companies seemed invincible, chalking up overwhelming victories over not only local com- panies but international and multinational competitors as well. Their success, however, created and strengthened a set of countervailing forces of localization. To many host governments, for example, these global companies appeared to

be a more powerful, and thus more threatening, version of earlier unresponsive companies with their unsophisticated international strategic mentality. Many host