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Introduction

International
business (IB) is the transactions and trading of goods and services through
cross-border activities as defined by Shenkar et al (2008, p9), the main player
in IB are Multinational Enterprises (MNE’s). MNE’s are an enterprise engage in
Foreign Direct Investment (FDI) and operate in more than one country. In the
past, the main way to conduct cross-border operations was through exports. But
since the evolution in IB, it can be done through FDI, outsourcing or off
shoring and foreign entry strategies. For the firms to succeed in these
cross-border activities they must build a solid formal and informal institution
and must have the right resources. The Institution-Based View (IBV) looks at
the external environment, there are 2 aspects to IBV, formal and informal
institutions, and the success for the firm is defined by how the firm follows
the “rules of the game”. Whereas, the Resource-Based View (RBV) looks at the
internal resources a firm has and their capabilities, the success of this is
measured by the resources and capabilities the company has and how well they use
it. This essay will discuss the role played by IBV and RBV in the general
evolution of IB through FDI, outsourcing and offshoring and through foreign
entry strategies.

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Foreign Direct Investment

FDI
is defined by Shenkar et al (2008, p60) as “when a firm invests directly in production
or other facilities in a foreign country over which it has effective control”.

Before the firms would export their goods overseas in order to attain cross-border
activity but not the firms undergo FDI in order to sell goods in that country
and their neighbouring countries. FDI involves a higher risk than exporting the
goods and services, however it allows the company greater control over its
products or services in the foreign market and gives them access to specialised
opportunities not available to exporters (Shenkar et al, 2008). We can see that
there has been a huge shift in FDI inflows and outflows in Figure 1. As seen in
figure 1, the FDI outflows and inflows are increasing at a steady rate since
1986. From 1982 to 1990 FDI outward and inward stock have almost increased by
300 percent and is still continuing to increase which shows that FDI have
started to take over exports since the early 1980s, as you can see in figure 2
that there has been a huge rise in FDI ever since the 1980s.

Figure
1

 

 

 

 

 

(UNCTAD,
2005, p14)

 

 

 

 

 

 

 

Figure
2

(The
World Bank, 2016)

 

MNE’s
have different strategic logic underlying their reason for FDI.

Resource-seeking FDI, attempts to acquire particular resources at a cheaper
cost than their home country. Resource-seekers can be put into three groups,
those seeking physical resources, those seeking cheap or skilled labour and
those seeking technological, managerial skills. For example, in 1994 Israel had
FDI worth around $500 million and grew by 10-fold in 2000. The reason for this
was that MNE’s were investing in Israel for resource seeking FDI. Israel have a
very high skilled workforce, they have one of the highest ratios of scientists
and engineers in the world and after the US and Japan they have the highest
patents per capita. So, Israel received a lot of foreign investment for this
matter, Cisco and Motorola are examples of one of many companies that invested
in Israel and opened up Research and Development (R&D) facilities. These
MNE’s have the resources to this as they are able to fund these projects and
then use the skilled workforce in Israel to come up with new products and
services as the RBV reveals. Market-seeking FDI attempts to secure market share
and sales for market growth as suggested by Shenkar et al (2008). Strategic
asset-seeking FDI attempts to acquire assets of foreign firms to promote their
objectives and to increase their international competitiveness.

 

The
eclectic paradigm has remained the dominant analytical framework for economic
theories for the determinants FDI and foreign activities of MNE’s as suggested
by Dunning (2000). The eclectic paradigm has three sets of independent
variable, Ownership advantages (O), Locational attractions (L) and
Internalisation (I). The OLI framework shows how these 3 sub-paradigms help MNE’s
be successful through FDI, if they look into these 3 factors then FDI can be
beneficial for them. The location advantages that FDI brings to the firm is
protectionism in the forms of tariffs or non-tariff barriers. The MNE’s can
overcome this by setting up production locally instead of exporting to this
country. It also helps to reduce the transportation costs which means lower
costs for the customers and helps the direct interaction with the customers and
local suppliers. Internalisation advantages occur when MNE’s participate in
FDI. When a firm interacts with the market they incur transaction cost, as they
will have to look for partners, product quality checks and enforcing contracts,
as they will be setting up in a new market. These high transaction costs can
lead to market failure; however, these costs are lower than doing cross-border
activities and therefore will help lower costs for the MNE investing abroad
rather than exporting the finished goods or services to the country.

 

The
internalisation theory is another theory for the reason MNE’s invest in FDI, “Internalisation
is the activity in which an MNE internalises its globally dispersed foreign
operations through a unified governance structure and common ownership”
(Shenkar, 2008). As suggested by Rugman (1985) the internalisation theory is
similar to Dunnings eclectic paradigm in which the first two elements are simply
combined in the internalisation theory, that the ownership advantage and
firm-specific advantage need to be internalised to be effective. “The
internalization theory applies transaction cost economics and the RBV to explain
the efficiency aspects of MNE’s” (Rugman, 2010). The internalisation theory is
all about internalising the costs which means it will be in the firm’s hand to
control the costs using their resources and capabilities which is what RBV is
all about.

 

Offshoring and
Outsourcing

Outsourcing
is defined as turning an activity to an outside supplier that will perform it
on behalf of the local firm (Peng et al, 2016). The firms main aim to decrease
their risk and costs, in order to be successful and one way of doing this is by
outsourcing a part of their value chain. Another option is offshoring, that is
when activities are moved from the firm’s main country of operation to another
country. This can help reduce risks and could help the firm get financial
gains.

 

The
main advantage of offshoring and outsourcing in cost reduction, however, in the
recent years, two other strategy motivators have gained significance
(Contractor et al, 2010). First, the knowledge-accessing motive, the firm will
not have the knowledge within the firm to be competitive in research,
production and marketing due to the complexity of the goods and services are
provided and hence the need for external knowledge inputs and expertise
(Contractor et al, 2010). Organisational and locational knowledge is often more
important than the knowledge the firm holds internally (Bierly et al, 2009). Second,
the relocation of operations abroad helps the MNE’s to gain a better
understanding of the foreign market and can therefore exploit it. Outsourcing
and offshoring help the firm in three strategic needs: “efficiency” or cost
reduction, “exploration” or access to knowledge and high skilled labour and “exploitation”
or development of the foreign markets (Dunning, 1993). We can see the role that
RBV has been played in offshoring and outsourcing, the company does not have
the resources within the firm to produce the goods or service for a cheap price
or at a certain quality due to low skilled workers and so they have to go
abroad or outsource the production or research. IBV has also played a role in
offshoring as the company will then build a relationship with the local government
which is part of the formal institutions which will help the MNE by reducing
the bureaucracy or through subsidies.

 

The
Heckscher-Ohlin (HO) theory suggests that countries have advantages in
different resource endowments and that they should produce those goods in which
they have an advantage in and trade goods with other countries in which the
same country does not have a comparative advantage in (Heckscher, 1919). This
meant that MNE’s would outsource or offshore their part of the value chain to
these countries instead of trading with them directly in order to cut some
costs. The theory suggests that these countries will use the resources the
best, which is what the MNE wants as they are not able to capture these values.

 

Haslam
et al (2013) suggest that the purpose of outsourcing and offshoring is to extract
the cost reduction and capture value by manipulating financial boundaries and
allows the company the process of value chain recalibration. Apple outsource
the assembly of their iPhone and iPad to Foxconn which is a company based in
China. This has helped Apple capture a lot of value by reducing their costs
from 20-30 percent of total income to 10 percent of total income. This was very
good for Apple, however, Foxconn had a big riot with the employees and so they
had to shut down the factory for a few days to calm the situation. This shows
that outsourcing can have benefits of cost reduction but then they had problems
with supply due to the factory being shut down, so outsourcing brings
situations in which the firm (Apple) had to control of.

 

Foreign Entry Strategies

MNE’s
want to expand international, and these Swedish researchers from Uppsala
university had come up with a theory to do so called “The Uppsala Model”. The researchers
believed that the existing theories at that time helped reduce cultural
differences but ignored the resources and capabilities held by the firm. The model
distinguishes four steps of entering an international market, which should not
be viewed independently of a company’s situation (Johanson et al, 2009). The four
steps are, no regular export activities, export via independent representative,
establishment of a foreign sales subsidiary, and foreign production/manufacturing.

From the research, they have found that companies first start off by expanding
in a nearby market, they then gradually gain experience and acquire better
resources so they expand to more distanced market. By distanced markets they
mean cultural distance, language, politics and geographically. RBV has played a
big role for these firms who follow the Uppsala model, as the MNE’s gain more
resources and capabilities through time, they can then expand internationally as
they will have the correct resources for it as RBV is all about internal
resources.

 

Mergers
and acquisitions is another way MNE’s use to do international business, it is
often used as a “quick fix route to globalisation” (Buckley et al, 1998). Often
MNE’s who both want to globalise and go international but do not have the
resources or capabilities to do so, they would merge together in order to gain
market share and is a quick way to globalise. However, there are often issues
which rise from mergers or acquisitions, which are language barriers or
political issues or cultural differences. The car manufacturers Chrysler and
Daimler had merged together, but due to their different cultural backgrounds
they had an unsuccessful merger. Here we can see how important the role of IBV
is with the informal institutions, that the cultural difference made the merger
unsuccessful. As you can see in Figure 3 that there has been a huge increase in
the number of mergers and acquisitions taking place in the recent years and the
value of them compared to the 1990s or early 2000s.

Figure
2

 

(Imaa,
2018)

Buckley
et al (1998) mentions that “the internalisation approach identified licensing,
franchising and subcontracting”, for example McDonalds does not open its new
store themselves but they franchise them out. They started off by franchising
within the country on a small geographical area which was the United States.

They then gained experience and the resources and capabilities to globalise and
expand internationally, so they started franchising around the world. This
shows the role that RBV played in McDonalds expansion that they had the
resources of money and experience to grow and expand. This meant that the MNE
did not have to invest heavily as they give out franchise licences and so they
do not need to invest heavily which reduces their financial risk.

 

Conclusion

In
conclusion, the IBV and RBV played a big role in the evolution of international
business and MNE’s. It started off MNE’s and countries mainly exporting goods
and services. But the evolution changed it and made international business more
easy and cheaper through FDI, offshoring and outsourcing and foreign entry
strategies. We have learnt that these other forms of cross-border activities
are not always successful if the company do not have the right resources and
capabilities, but if they do then it can make them very successful with the
examples of Apple and McDonalds. These companies have gained market share and
capitalisation, and to adjust to this evolution they have used the
internalisation process effectively. However, the evolution of international
business has not been positive for everybody, the host countries of FDI and
outsourcing/offshoring, have not always benefited as the MNE’s exploit the
resources and labour. This is not always ethical as they often get paid very
low wages for high skilled work and the profits made from these operations are
taken back to the home countries by the MNE’s so the host countries have
nothing to gain often. Sometimes the MNE’s do help by investing in new
infrastructure, and they gain through technological spillovers.  

 

 

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