International Business Management - Lecture No 03

1. Lecture No: 03
Course Facilitator: Khurshid Alam Swati
University of Swat, Swat
Email your query to:
Khurshidalamswati@yahoo.com
Theories of
internationalization

2. What do the following
companies have in common?
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3. Definition of a MNC
• One of the most widely used definitions of the MNC
today is “an enterprise that engages in foreign direct
investments (FDIs) and owns or controls value-
adding activities in more than one country”
• Underlying this view are two crucial parts, one
pertaining to a (1) long-term investment of resources
in other countries (FDIs) and the other to the (2)
control of value-adding activities in foreign
environments
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4. Theories of Internationalization
1. The Product Cycle Theory of Internationalization
2. The Opportunistic Growth Theory of International
Expansion
3. Goshal and Bartlett’s Model of Innovation Processes
in Multinationals
4. Theory of incremental internationalization
5. Eclectic paradigm - OLI paradigm
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5. 1. The Product Cycle Theory of
Internationalization
The theory was made by Raymond Vernon
In early stage all raw materials and labor comes
form country in which it was invented
Companies develop new products to be competitive
in markets in developed economies
After adopting in international markets its production
move to host country, In some cases product
becomes an item that is imported by its original
country of invention
 E.g. Microsoft manufacturing - Ireland Humacao, Puerto Rico, USA
Product is moved to less developed countries
Must have a core competency
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6. Figure 2.3: Product Life Cycle

7. Product life-cycle – Int’l Context
1. Introduction
2. Growth
3. Maturity
4. Saturation
5. Decline
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8. 2. The Opportunistic Growth Theory of
International Expansion
Opportunism is the conscious policy and practice of
taking selfish advantage of circumstances – with little
regard for principles, or with what the consequences
are for others
Opportunist actions are expedient actions guided
primarily by self-interested motives. The term can be
applied to individual humans and living organisms,
groups, organizations, styles, behaviors, and trends
“The harder I try, the luckier I get”
Goal is to improve a firm’s ability to respond
successfully to opportunities
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9. 3. Goshal and Bartlett’s Model of
Innovation Processes in Multinationals
This theory focus on structure of organization
Four patterns of centralization and localization
of innovation activities
Localization and internationalization
Centralization and decentralization
1. Center for Global operations – Centralized System
2. Local for Local operations – Decentralized System
3. Local for Global – Home Country
4. Global for Global
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10. Methods of internationalizing operations
Outsourcing – contracting with another
company to carry out operations, usually more
cheaply than the firm can do ‘in-house’.
Includes:
 Business process outsourcing (BPO)
 Offshoring (contracting out of a function to a low-
cost location)
FDI (Foreign Direct Investment) – ownership and
control of foreign assets. Includes:
 Acquisition of an existing business
 Joint venture
 Merging 10

11. Figure 2.4: Incremental internationalization
4. Theory of incremental
internationalization

12. Subsidiary
A subsidiary is a company that is partly or completely owned by
another company that holds a controlling interest in the
subsidiary company
If a parent company owns a foreign subsidiary, the company
under which the subsidiary is incorporated must follow the laws
of the country where the subsidiary operates
The parent company still carries the foreign subsidiary's
financials on its books (consolidated financial statements)
For the purposes of liability, taxation and regulation,
subsidiaries are distinct legal entities.
Overseas Subsidiaries of NBP
 National Bank of Pakistan" Kazakhstan, ( Kaskelen)
 CJSC NBP Pakistan Subsidiary Bank in Tajikistan
 Ufone (Pakistan Telecom Mobile Ltd) a wholly-owned subsidiary of
PTCL

13. 5. Eclectic paradigm - OLI paradigm
A theory that provides a three-tiered framework for a
company to follow when determining if it is beneficial
to pursue direct foreign investment
Deriving ideas or style from a broad and diverse
range of sources
Paradigm - a typical example, pattern, or model of
something
Mixture of ideas around the globe
Based on
1. O - Organization ownership advantages,
2. L - Location advantages and
3. I – Internalization - PTO 13

14. Figure 2.5:
Dunning’s eclectic paradigm

15. OLI Model
MNE must have some strategic advantage
which allows it to compete effectively with
domestic firms
Must select countries for investment which
have attractive sourcing and/or marketing
environments
Must have managerial ability to coordinate
operations located in foreign countries at a
cost that is less than the benefit received
from operating in these locations
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16. OLI Model
Firms pursuing international expansion
must have some form of advantage in
each of these factors to overcome the
costs and disadvantages inherent in
competing in int’l level and as a non-
domestic company in a foreign market
Theoretical basis for the existence of
MNEs
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17. Assignment No: 01
Regional Trading Blocs
Last date of Submission: 19th March 2014
QUIZ…..!!!
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