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From Internationalization

to Globalization of
Services
6th Course

mergers

downsizing

uncertaint
y

acquisitio
ns

improving the
bottom line

increasing
competitivenes
s

Value-centric business environment

From internationalization to
globalization TNC in services

Broad definition of TNC -> firm which has the power


to co-ordinate and control operations in more than
one country, even if it does not own them.

Basic characteristics:

Co-ordination and control of various stages of individual


production chains within and between different countries;
Potential ability to take advantage of geographical
differences in the distribution of factors of production and
in state policies;
Potential geographical flexibility ability to switch and
reswitch its resources and operations between locations.

Motivations:
Strategic motives - drive the decision to invest
abroad and become a TNC:
market seeking
resource seeking - raw material seeking
efficiency seeking
strategic asset seeking - knowledge
seeking
political safety seeking
client following
These categories are not mutually exclusive

Development of TNC:

sustainable competitive advantage that enables the


company to compete effectively in the home market firm-specific, transferable, and powerful enough to
compensate for the firm disadvantages of operating
abroad (foreign exchange risk, political risk and increased
agency cost)
competitive advantages enjoyed by TNCs:

economies of scale and scope


managerial and marketing expertise
advanced technology
financial strength
differentiated products
competitiveness of the home market source of competitive
advantage Porters diamond

Porters diamond model for


the competitive advantage of
nations
Governme
nt
Catalyst
and
challenger

Firm
strategy,
structure
and rivalry

Factor
conditions
Key factors of
production are
created!

Spatial proximity of
upstream and
downstream industries
facilitates the exchange
of information

Direct competition
impels forms to
increase productivity
and innovation

Demand
condition
s
Related and
supporting
industries

More demanding the


customers, greater
the pressure on
companies

Internationalization theories

Hymer:

assumptions:

Domestic firms have an intrinsic advantage over foreign firms,


a better understanding of the local business environment
nature of the market, business customs, legislation etc.
Foreign firms wishing to produce in that market would have to
posses a firm-specific advantage that would offset the
advantages of indigenous firms firm size, economies of scale,
market power, marketing skills, technological expertise

FDI became foreign production instead of foreign


exchange
FDI determined by the existence of intangible assets
that can be better exploited on the international market;
The ratio foreign affiliate production / local production is
higher for:

Information-intensive activities
Activities for which reputation = the product itself

Internationalization theories

Hymer:
The possession of advantages as a cause of
international operations.

Firms are by no means equal in their ability to operate in an


industry. Certain firms have considerable advantages in
particular activities. The possession of these advantages
may cause them to have extensive international operations
of one kind or another. (Hymer 1976, 41).
The motivation for the investment is not the higher interest
rate abroad but the profits that are derived from controlling
the foreign enterprise (Hymer 1976, 26).

Hymers contribution - seminal, because:

it was the first time that the firm and international production
were the specific focus of attention
he emphasizes the role of market imperfections in stimulating
the internationalization of production
he showed that, once established, the control of overseas
productive assets itself became a source of competitive
advantage.

Internationalization theories

Vernon

evolution of international production

:
:

Explanation of the locational evolution of TNC


and initial overseas investment by US firms.

Producers - possibility of introducing new products


in their home market / producers located elsewhere;
New products - would reflect the specific
characteristics of the domestic market
Increased competition, export barriers displaces
exports and redirects them to other areas in which
production has not begun
The production cost advantages of the newer
overseas plants would lead the firm to export to
other third-country markets
As the product becomes standardized production
will be shifted to low-cost locations in developing
countries.

Internationalization theories

Vernon

evolution of international production

Oligopolistic behavior of TNC:


Innovation phase country of origin: not only US, but
also European and Japanese
Mature oligopoly follow the leader strategy leads
to a clustering of investment decisions
Senescent oligopoly - production locations are
determined by geographical differences in cost lowcost locations at a global scale

Nowadays:

World international investment reciprocal (crossinvestment)


Initial source of innovation from any point in the firms
global network.

Drivers of the expansion of


TNC activity in services
The rise in the share of services in economic activity
The growing service intensity of the production of goods
The externalization of services to independent providers
The deregulation of service markets
The liberalization of FDI policies
have created opportunities for increased services FDI.
- greater competitive pressures in service markets - pushed firms
to seek markets abroad and strengthen their competitiveness.

The ownership-specific advantages of firms, locationspecific advantages of countries and internalization


advantages to firms from investing directly abroad
combine to determine the extent and pattern of
expansion by firms from service industries

Internationalization theories:

Dunning the eclectic paradigm:

A firm will engage in international production when all the


following conditions are present:
The firm possesses certain ownership-specific
advantages not possessed by competing firms of
other nationalities;

Such advantages are more suitably exploited by the


firm itself rather than by selling or leasing them to
other firms the firm internalizes the use of its
ownership-specific advantages;

There must be location-specific factors which make it


more profitable for the firm to exploit its assets
overseas rather than in domestic locations.

Ownership-specific advantages (assets


internal to a firm):
Own unique competitive advantages:
producer services - banking, finance, business, professional
services - firms are building global advantages based on their
possession of, or privileged access to, proprietary information,
tacit knowledge, skills, brand names and learning.
consumer services - hotels, fast food, car rentals, retailing firms are exploiting their home-based and/or local capabilities
to organize activities, acquire knowledge about their
customers, network with other agents and create strong
brand names.
services such as stock broking, foreign exchange or securities
dealing, business consultancy, commodity-broking, data
processing, data provision, data transmission and informationgathering and processing - ownership advantages are often
based on the possession of software and hardware skills and
technologies.
some service firms outward expansion - insurance, trade,
banking, professional business services and retailing - based
on their need for economies of scale and scope, as well as
access to global markets and supply capabilities.

Location-specific factors:

Advantages available, on the same terms, to all


firms whatever the size and nationality, but are
specific to particular locations and have to be used
there.

Services with low degree of tradability - liberalization and


market growth remain key to attracting FDI.
Directly tradable services - main location advantages:
access to a good information and communication
infrastructure
well-developed institutions
trained human resources available for employment at
competitive cost.
Other types of location-specific factors:
Market: dimension, potential
Resources: transport
Production costs
Political conditions
Cultural/linguistic affinities.

Internalization advantages
Reasons:
to safeguard proprietary knowledge - banking and financial
services, most information-intensive and professional services
to ensure product quality - advertising, market research, some
consumer services
to minimize transaction costs associated with opportunism
to protect property rights
to avoid search and negotiation costs
to tap synergies from geographical diversification - financial
services
to obtain inputs or develop new markets - trading companies
In other services, non-equity links or minority joint ventures are
preferred - hotels, restaurants, car rentals
Cooperative ventures - a way of sharing financial risk in such
industries as investment banking or insurance.

OLI Advantages (ownership, localization, interna


The company owns
specific assets that
guarantee competitive
advantage

Ownership advantage

Would maintaining the


control over these assets
be profitable ?!
Internalization advantage

Internalizin
g assets

YES

Selling,
licensing and
renting assets

NO

What type of
internationalization method
is more profitable FDI or
export?!
Localization advantage

FDI

YES

NO

Export

Sursa: adaptare dup Dunning, J. (1993) , Multinational Enterprises and the Global Economy , Harrow: Addison-Wesley

International expansion
offshoring of corporate services
functions
According to UNCTAD and BCG Consulting offshoring:

captive offshoring producing the service in-house, by setting up an


affiliate in the chosen location

approx 70-80% of the offshoring activity takes place like this.

captive offshoring allows the company to take advantage of the scale


and cost advantages, while maintaining operational control of the
offshored activities

Lufthansa and Philips established such centres in Poland, for


transactions processing and accounting operations.
outsourcing companies that choose this model aim at exploiting cost and
specialization advantages of some locations or suppliers, while agreeing to
give up operational control.
Any offshoring decision requires a firm to choose to remove a service
function previously undertaken in-house at home and entrust it to a provider
either its own foreign affiliate or a third party located outside the home
country.
The potential for offshoring of services may partly be gauged by the
progress in outsourcing of services at the national level

International expansion offshoring


of corporate services functions

Integrated model for services


companies international
expansion
Offshoring

Location
selection
Captive
Offshoring
Domestic
Internalization

Offshoring to an
independent
supplier
Domestic
externalization

Country of origin

Model

Impact

Control

Offshoring
to
an
independent supplier
Captive offshoring

Internalization

Business
Organization

Externalization

Domestic
externalization
Domestic
Internalization

Source: Boston Consulting Group (2005), Achieving Success in Business Process Outsourcing and Offshoring

Noi modele de delocalizare