Ibp Exam Revision

Responses to Review Questions

Answer One

What are the factors that influence a company's decision to go abroad? Please explain how these are related to each other.

In the discussion on the internationalisation process of a firm, the product life cycle model plays a major role. Please explain and discuss the usefulness this model.

(A) Generally, the first decision to go abroad is a specific one. It is a decision to look at the possibility of a specific investment in a specific country, not a general decision to look around the globe for investment opportunities. At this stage the organisation has no experience with the complexities of foreign investment, although it often has had some export experience. There are no standard operating guidelines, which can be given to deal with these complexities. What is needed mostly is a strong push and/or commitment to go abroad. A company benefits from these earlier experiences in the subsequent investment decisions. The organisational factors include:

* role of the management

* motives of the organisation

* success at home

Other than these internal forces, a number of factors in the environment, outside the organisation, may also force a company to go abroad. These drivers of internationalisation may include:

* unsolicited proposal that cannot be ignored. These may include proposals from a foreign government, distributor or customer

* competitive drive or bandwagon effect following other competitors or a general belief that presence in a certain market is a must

* strong competition from abroad in the home market.

It is normally a combination of internal and external factors that is the reason behind a decision to go abroad. Although sometimes it is possible to explain investment in a certain market with one of the above factors, e.g. a number of investments in China can be directly related to bandwagon effect, it is generally not possible to pinpoint one particular force for a particular investment decision.

(B) According to this theory a product goes through several stages of development.

The first stage is the innovation stage of the product,

The second stage is the introduction in the domestic market.

The third stage is the export of the product.

The next stage is the maturity of the product.

As it becomes standardised at this stage, it is being imitated and even produced overseas by foreign firms. The product when newly invented, attracts high-income groups as customers. Its demands grow rapidly in more advanced countries. At this stage the production also starts in other advanced countries, sometimes in a subsidiary of the inventing company. If the cost benefits of producing in the second or third country are large enough to offset transportation cost, then the subsidiary or a foreign producer may even export back to the United States. Having seen the benefits of these operations, a number of firms will then start producing and exporting the product. The companies just imitate the original innovating company, and often, even produce in the same geographic locations. In the final stage new competitors, even from far away markets, rise and start producing the same products. And, if they can achieve better production costs, due to cheaper labour, other input, or standardisation of production systems, they start exporting back to the USA and other early producer countries such as Western Europe. A number of products have followed this pattern. Television invention in the USA, typically followed this pattern. When production and marketing was standardised, costs reduced and prices dropped, so it moved to Europe and later to Japan and Korea. Vernon's product life cycle model.

This model of sequential decision making has had a great influence on internationalisation theory. The model was originally developed to explain U.S. investments in Europe and also in cheap labour countries. Its usefulness goes beyond Vernon's reappraisal of its efficacy under changed world conditions. Its relevance arises from the fact that the dynamic of the model lies in the interaction of the evolving forces of demand (taste) patterns and production possibilities. The twin rationales of cost imperatives and market pull are simply explained in Vernon's model. Although its validity for the explanation of the behaviour of modern multinationals may be questioned, this article spawned much of the empirical literature on international business.

Answer Two

Multinational enterprises are different from companies that confine their activities to the domestic market. A multinational enterprise (MNE) is a firm headquartered in one country with operations in other countries.

Why would firms consider becoming a multi-national enterprise? Please describe fully a typical internationalization process for a firm producing a standardised product.

Firms become multinationals for a number of reasons. Some of these include the following: (a) a desire to protect themselves from the risks and uncertainties of the domestic business cycle; (b) a growing world market for their goods or services; (c) a response to increased foreign competition; (d) a desire to reduce costs; (e) a desire to overcome tariff barriers; and (f) a desire to take advantage of technological expertise by manufacturing goods directly rather than allowing others to do it under a license agreement.

Under the premise that foreign markets are risky, companies expand their operations abroad incrementally and cautiously. Setting up a wholly owned subsidiary is usually the last stage of doing business abroad. A typical internationalization process for a firm producing a standardized product might begin with a licensing agreement: a contractual arrangement in which one firm provides access to some of its patents, trademarks, or technology to another firm in exchange for a fee or royalty. Apart from a licensing agreement, a firm might export via an agent or distributor. This might be followed by the direct hiring of a domestic representative or the establishment of a foreign sales subsidiary. The next step might be the establishment of local packaging and/or assembly operations. This is typically followed by FDI.

Multinational enterprises have a strategic philosophy that is