Chapter 8 Global Strategy

The use of international strategies are increasing, Multiple factors and conditions are influencing
the increasing use of these strategies, including opportunities to
Extend a products life cycle
Gain access to critical raw materials, sometimes including relatively inexpensive labor
Integrate a firms operations on global scale to better serve customers in different countries
Better serve customers whose needs appear to be more alike today as a result of global
communications media and the Internets capabilities to inform
Meet increasing demand for goods and services that is surfacing in emerging markets
When used effectively, international strategies yield four primary benefits. Firms use

international business-level (follows generic

strategies of cost-leadership, differentiation,
focused or broad) and international corporatelevel strategies to geographically diversify
their operations (home country usually most
important source of competitive advantages). International business-level strategies are usually
grounded in one or more home-country advantages. Research suggests that there are four
determinants of national advantage (figure on right).
There are three types of international corporate-level strategies. A multi-domestic strategies
focus on competition within each country in which the firm competes. Firms using a multidomestic strategies decentralize strategic and operating decisions to the business units operating
in each country, so that each unit can tailor its products to local conditions. A global strategy
assumes more standardization of products across country boundaries; therefore, a competitive
strategy is centralized and controlled by the home office. Commonly, large multinational firms,
particularly those with multiple diverse products being sold in many different markets, use a
multi-domestic strategy with some product lines and a global strategy with others. A
transnational strategy seeks to integrate characteristics of both multi-domestic and global
strategies for the purpose of being able to simultaneously emphasize local responsiveness and
global integration.

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Two global environmental trends liability of foreignness and regionalization- are

influencing firms choices of international strategies as well as their implementation. Liability of
foreignness challenges firms to recognize that four types of distance between their domestic
market and international markets affect how they compete. Some firms choose to concentrate
their international strategies on regions rather than on individual country markets.
Firms can use one or more of five entry modes to enter international markets. Most firms begin
with exporting or licensing, because of their lower costs and risks, but later they might use
strategic alliances and acquisitions as well. The most expensive and risky means of entering a
new international market is establishing a new wholly owned subsidiary. On the other hand, such
subsidiaries provide the advantages of maximum control by the firm and, if successful, the
greatest returns.
Firms encounter a number of risks when implementing international strategies. The two
major categories of risks firms need to understand and address when diversifying geographically
through international strategies are political risks and economic risks.
Successful use of international strategies contributes to a firms strategic competitiveness in the
form of improved performance and enhanced innovation. International diversification facilitates
innovation in a firm because it provides a larger market to gain greater and faster returns from
investments in innovation. In additions, international diversification may generate the resources
necessary to sustain a large-scale R&D program.
In general, international diversification is related to above-average returns, but this
assumes that the diversification is effectively implemented and that the firms international
operations are well managed. International diversification provides greater economies of scope
and learning which, along with greater innovation, help produce above-average returns. Several
issues or conditions affect a firms use of international strategies to pursue strategic
competitiveness. Some limits also constrain the ability to manage international expansion
effectively. International diversification increases coordination and distribution costs, and
management problems are exacerbated by geographic dispersion, trade barriers, logistical costs,
and cultural diversity, other differences by country and relationship between organization and
host country. There are two risks in international environment.
Political risks
Changes in government policies
Government instability
Economic risks
Conflict or war
Differences and fluctuations in currency
values
Government regulations
Investment losses due to political risks
Conflicting and diverse legal authorities
Potential nationalization of private assets
Government corruption

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Case: The International Competitiveness of Asian Firms

What is the international competitiveness of the largest Asian firms? How do these Asian firms
develop their country specific advantages (CSAs) and firms specific advantages (FSAs)?
In his book, The Competitive Advantage of Nations, Porter used country level data on
industry export market shares, where a competitive industry is defined as one which has a greater
share of the world market in that industry than the overall average world share of that country's
exports. Subsequent work on international competitiveness has also used country level data but
has moved beyond trade data to include shares of foreign direct investment (FDI) (Dunning,
1993). Furthermore, the original Porter diamond framework which included factor conditions,
demand conditions, domestic rivalry, and the related and supporting (mostly service) industries
in an interdependent system (where these four determinants was also affected by the role of
government and chance). This framework has been upgraded to include more details of the
domestic aspects of competitiveness, including the business context and the labor market for
skilled and unskilled workers (Cho and Moon, 1998,2000). As discussed in the next section,
Rugman and D'Ci-uz (1993) and Moon et al. (1998) and others have advanced on the Porter
single diamond framework by introducing and testing a double diamond framework. While the
Porter single diamond works reasonably well to explain the competitiveness of large countries
like the USA and Japan, the double diamond framework is necessary to analyze the
competitiveness of smaller countries such as Canada, Korea, Australia, etc.
Findings
a. Asian firms are regional global
In an Asian context, this implies that large firms from Japan, Korea, China, Singapore,
Malaysia, Indonesia, etc. would expect to grow internationally at a faster pace within the
broad triad of Asia: than in North America or Europe. Indeed, Collinson and Rugmm
(2008) found this was precisely the nature of Japanese firm level competitiveness. Only a
few Japanese firms such as Toyota, Honda and Sony have a significant presence in both
North America and Europe. Otherwise, only Flextronics from Singapore has overcome
the liabilities of inter-regional foreignness. In addition, Rugman found that three Korean
firms are partially globalized and have more than 20 percent of their sales in North
America. Rugrnan also analyzed the upstream supply chains of Korean firms (in terms of
assets, the number of establishments, and the number of employees) but confirmed a
strong regional presence for large Korean firms.
b. The FSA/CSA Matrix
The first framework brings together country and firm effects based upon Rugman.
Country level factors are operationalized as home CSAs, while firm level factors are
operationalized as FSAs. Based on the thinking which emphasizes firm and country
effects, the following matrix (figure beside) offers a useful working framework to assess
the competitiveness of firms. On the vertical axis, we place CSAs either low or high. On
the horizontal axis, we place FSAs either low or high. This leads to four cells for analysis.

Cell 1 represents a situation in which only

CSAs are important. Comparative advantage
explains movements of goods and factors
across nations. Financial capital depends
upon interest rate differentials between
countries. There will be MNEs in Cell 1 and
their competitiveness will depend upon
natural endowments of minerals, oil wells,
forest products, hydro-electric power and other natural resources in their home country.
MNEs will also have CSAs based upon cheap labor (for example, manufacturing in
China), or cheap-skilled labor (information technology in India). Finally, there may be
state owned MNEs which have been created by government policy, as in Singapore and
some of the oil rich Persian Gulf countries.
In Cell 4, only FSAs matter. The FSAs stand alone and are not influenced by CSAs. This
is a cell reflecting the resource-based view of strategic management. The firm has strong
FSAs which are unique and proprietary itself. There are isolating mechanisms (entry
barrier) which prevent rival firms from acquiring the ESA. These isolating mechanisms
may be entirely due to aspects of the organizational structure and the nature of the top
management team, a type of Penrosean effect. When the resource-based view is applied
to MNEs it is necessary to examine the internal network of the firms. There will be
codification of internal knowledge FSAs and routines for its use within the internal
network of the firm.
In Cell 3, both FSAs and CSAs matter. The FSAs of the firms are enhanced and
facilitated through home country CSAs. In general, there may be internal managerial
tensions in reconciling CSAs and FSAs. The better managed MNEs successfully combine
FSAs and CSAs. In Cell 2, neither
CSAs nor FSAs are important.
Firms in this cell need to move to
either Cell 1 (building upon CSAs)
or to Cell 4 (by developing FSAs).
The
FSAICSA
matrix
of
international business to analyze
the competitiveness of large Asian
firms we find that six Korean firms
rely on CSAs in Cell 1. Three of
Korea's nine firms have also
developed strong FSAs and so
operate in Cell 3. A total of 19 of
Japan's firms rely on CSAs in Cell
1 but another 28 have developed
strong FSAs to complement he strong CSAs and operate in Cell 3. Finally, four of

China's firms rely on strong CSAs in Cell 1, and only one is Cell 3 with strong FSAs to
match.
c. The Regional Matrix
The second framework was
developed in Rugman (2005); it
divides FSAs into two types downstream FSAs (which are
relevant to consumers and
measured by firm sales) and
upstream FSAs (which are more
relevant to production activities
and are measured by firm
assets). These FSAs can be
assessed across the home region
of the triad, across two regions
of the triad, or globally, which is
across all three regions. In
general, very few firms operate
globally, either in upstream assets FSAs or in downstream sales FSAs. Only 21 Asian
firms operate across two or more triad regions by sales and only 12 by assets. The vast
majority of firms operate mainly within their home region, both on upstream and
downstream FSAs. We apply this framework to Asia's firms and find, indeed, that the
great majority operates within the Asian home region. This is shown in figure beside.
Figure also shows the gap between downstream and upstream FSAs in terms of
geographic scope: the development of upstream FSAs is lagging behind that of
downstream FSAs. This result implies that upstream FSAs are more location-bound
(intra-regional) than are downstream FSAs. This is partly because upstream FSAs interact
with home region CSAs and partly because upstream FSAs are not easily transferred to a
foreign region due to the liability of inter-regional foreignness.
It is important to note that the few Asian firms operating globally across all three regions
of the triad, in terms of downstream sales, are mainly electronics firms like Samsung
Electronics and LG Electronics from Korea; Canon, Sony, and Ricoh from Japan; and
Flextronics from Singapore. The electronics industry builds strongly on Asia's CSAs. The
electronics industry requires high-demand conditions (high income), educated labor, and
supporting industries, and also needs cheap labor in the manufacturing process. Thus, the
Asian electronics h n s developed their FSAs from strong CSAs in their home region of
Asia. Yet, the upstream side of the Asian electronics firms is heavily focused on their
home region. Only Sony and Flextronics have significant assets in foreign triad regions,
but they still have more than 50 percent of their assets in Asia-Pacific (Sony is 52.3
percent and Flextronics is 54.4 percent).

Conclusion
One of the intriguing findings of this paper is that a large component of inter-national
competitiveness for Asian firms is achieved through intra-regional sales within the home region.
Their international competitiveness depends on building up FSAs based upon home country
CSAs, and exploiting these FSAs regionally. In this context, Asian firms are no different from
those in North America and Europe. Across the worlds 500 largest firms the great majority of
sales (and assets) occur within the home region of the triad. This implies that international
competitiveness should not be confused with globalization. Asian firms do not compete globally;
instead, they operate regionally.
In addition to the empirical contributions described above, this study provides new insights
for practical international strategy formulation and implementation. As a firm operates largely in
its home region, it should focus on developing (home) regional competitiveness. For a firm from
Japan, its biggest competitors are likely to be from Korea and other Asian countries. Likewise, a
European firm competes mainly with other European firms.
Cross border activities of an MNE have two goals as the MNE formulates and implements its
international strategy. First, an MNE can reach economies of scale and scope by integrating
across homogeneous countries. Since the MNE develops most of the important resources at its
parent firm, the MNE is likely to integrate in its home region countries to attain costeffectiveness in the application of its FSAs. An MNE can sell the same products and service in
the same way within its home region. We have presented evidence showing that large firms
generate about 75 percent of their downstream (sales) and upstream (assets) FSAs in their home
region.
Second, an MNE may leverage diversification benefits by expanding into heterogeneous
markets. However, it is highly questionable whether MNEs really pursue diversification benefits
because their presence in foreign regions is not significant enough to obtain the diversification
benefits (less than 25 percent of sales and assets). MNE may develop some FSAs and CSAs in a
foreign region only when those FSAs and CSAs are unavailable in its home region. For example,
most Asian electronics firms are more global than any other firms in terms of their geographic
sales. However, those electronics firms develop their FSAs and CSAs and produce their products
in their home region. Another example is Nike, which produces most of its products in Southeast
Asian countries due to the cheap labor costs, a CSA. In contrast, Nike sells its products mainly,
about 45 percent, in North America due to its brand awareness, an FSA, and demand condition, a
CSA.
When an MNE aims to operate more than in one triad region, the MNE needs to develop
different FSAs for other regions. Empirical evidence shows that only a few MNEs possess those
capabilities, possibly due to cultural, institutional, economic, and political differences. In a
foreign region, an MNE may prefer non-equity methods such as joint venture, partnership, and
licensing contracts to wholly owned subsidiary due to the liability of intra-regional foreignness.