to stay in business, it must have some fairly unique
competitors. It is only when the advantage is somehow
mobile that there is a possibility of engaging in foreign
Some advantages and some international locations are better
forms of international involvement than to others."
from Daniels and Radebaugh, International Business (4th edition), p.507
A great example of a unique advantage is location. A supermarket or convenience store has a limited monopoly over some set of consumers living nearby, limited to the extent that its prices on a few items can be fairly high, so long as it's not worthwhile for consumers to transport themselves to a more distant store for slightly lower prices.
Another advantage is a trademark. Only one company has the rights to use a given trademark: if you want to purchase goods with that trademark, you must buy from that company.
A particular production process can be an advantage, either because of a proprietary technology or because the sequential components of production work together especially smoothly in a particular company.
Companies have to pay for these advantages or assets: land
reflect the benefit of a given location; trademarks are
to the extent that firms advertise and maintain product
technologies must be developed; and a smoothly running
chain takes good workers and suppliers, managerial excellence, and
attention. Given the expense of
these assets, it's worthwhile to consider how they can be
in foreign markets: how can the firm increase its return
in a location, trademark, production process,...?
|Read my longer treatment of this strategic approach to management.|
FORMS OF INTERNATIONAL BUSINESS
The firm can sell a physical product abroad, i.e., can export. A firm can locate a production facility abroad, i.e., engage in foreign direct investment. There's an array of intermediate forms of international business that can allow a firm to get international returns on its unique advantages. These include:
|Exporting||physical product||sales price (or countertrade)||1) the only changes from domestic operations entail
2) little investment -- typically no investment abroad
|1) susceptibility to trade barriers;
2) logistical difficulties;
3) less suitable for service products
4) susceptibility to exchange-rate fluctuation
|Licensing||technical info, assistance, and/or use rights||licensing fee, and commitment to use the info or rights||1) increases return on investments in technology,
2) little additional capital or time investment
|1) the agreement generally prohibits the originating
the assets in particular foreign markets;
2) quality control
|Franchising||trademark, on-going service, some inputs, shared marketing expense||payment for trademark; payment for inputs used; share of operating revenues or profits||1) important way of gaining foreign returns on certain kinds of customer-service and tradename assets; 2) some control over the conditions of sale in the foreign market; 3) limited financial commitment||quality control|
|Management Contracts||people, for a period of time||salary, benefits, and indirect costs; share of operating revenues or profits||1) contractor puts up no capital and bears no risk; 2) useful in foreign contexts that prohibit (or are too risky for) FDI||contractee will become a competitor, at least in the local market|
|Turnkey Operation||design, construction, and equipping of a production facility||all costs plus fees; assumption of ownership and risk at end of project||1) contractor bears no risk; 2) useful in foreign contexts that prohibit (or are too risky for) FDI||contractee will become a competitor, at least in the local market|
|Contract Arrangements||expertise, financing, materials, or finished product||inputs available in the foreign country||avoids currency controls and foreign-exchange risk||may be difficult to negotiate a fair arrangement|
|Foreign Direct Investment||capital, management, technology; perhaps key material inputs||repatriated profit; licensing fees; transfer payments for inputs||1) control; 2) profit; 3) possibility of tax avoidance through transfer pricing||capital and operating commitment|
||see above||see above||1) smaller investment; 2) local marketing and production/ procurement expertise from local partner||less control over the operation|
||see above||see above||total control and returns||1) larger commitment; 2) perceived as a competitor by local producers (if any); 3) risk of national expropriation|
THE O-L-I FRAMEWORK
In an attempt to explain which firms engaged in FDI and where, the British economist John Dunning developed a framework (in the early 1980s) for understanding the international exploitation of corporate assets. He referred to these assets as organization-specific advantages. Where and how these advantages could be exploited in a foreign context depended on the relative advantages of different locations and degree of internalization required. As a result, this framework was called the O-L-I framework. (Dunning also referred to this as the "eclectic theory," because the theoretical origins were in business (strategy), geography (location), and economics (industrial organization and transactions-cost analysis).
This framework goes two steps further than the strategic
perspective of identifying, deploying, and developing
firm-specific assets. The OLI framework allows us to think
about where assets
should be deployed.
What advantage does the firm have over foreign competitors in a particular foreign setting? If the answer is "none," then the firm should not engage in international business, or should at least turn its attention toward a different foreign setting. Possible advantages include: