CBPA CBPA Dean's Research Seminar Dean's Research Seminar

SeriesSeries

Presentation of Presentation of ResearchResearch

Deepak SethiDeepak Sethi

February 23, 2007February 23, 2007

Overview of the ResearchOverview of the Research One among a trilogy of three One among a trilogy of three

conceptual papers conceptual papers

Seek to extend the competitive Seek to extend the competitive advantage literature – generic as advantage literature – generic as well as the global business contextswell as the global business contexts

1.1. Refine the dynamic capabilities Refine the dynamic capabilities notion by presenting a notion by presenting a dynamic dynamic adaptationadaptation framework framework•Illustrate its application through Illustrate its application through case studies of two firms – case studies of two firms – Bombay Dyeing and RelianceBombay Dyeing and Reliance

•Submitted for presentation at Submitted for presentation at the SMS 2007 conference the SMS 2007 conference

2. Refines the International Business 2. Refines the International Business literature which traditionally has literature which traditionally has treated countries as homogenous treated countries as homogenous entitiesentities– Analysis at country, region or bloc level Analysis at country, region or bloc level

(e.g. emerging economies) masks (e.g. emerging economies) masks important intra-country differences and important intra-country differences and local factorslocal factors

– MNEs make FDI decisions based on the MNEs make FDI decisions based on the congruence of firm strategy and location congruence of firm strategy and location advantage factorsadvantage factors

– Use this framework to explain the vast Use this framework to explain the vast regional and sectoral disparities of FDI regional and sectoral disparities of FDI within China and Indiawithin China and India

– Submitted to the Academy of International Submitted to the Academy of International Business conferenceBusiness conference

Overview ContinuedOverview Continued

3.3. Some traditional conceptualizations no Some traditional conceptualizations no longer reflect the scale and scope of longer reflect the scale and scope of contemporary global business contemporary global business operations operations – Over emphasis on the costs of doing abroadOver emphasis on the costs of doing abroad– Global business operations are now more Global business operations are now more

multilateral and not merely bilateralmultilateral and not merely bilateral– Present a conceptual framework that Present a conceptual framework that

integrates the costs as well as the benefits integrates the costs as well as the benefits of doing business abroad, in both contextsof doing business abroad, in both contexts

– Paper is under review at the Paper is under review at the International International Business ReviewBusiness Review

Overview ContinuedOverview Continued

Toward a More Complete Toward a More Complete Perspective on Multinationality Perspective on Multinationality

A Conceptual Review of the Costs A Conceptual Review of the Costs and Benefits of Doing Business and Benefits of Doing Business

AbroadAbroad

byby

Deepak SethiDeepak Sethi

William Q. JudgeWilliam Q. Judge

Theoretical DevelopmentTheoretical Development• Hymer’s (1960 / 1976) seminal work first Hymer’s (1960 / 1976) seminal work first

provided the rationale for FDI – provided the rationale for FDI – distinguishing it from distinguishing it from foreign portfolio foreign portfolio investmentinvestment

• Costs of doing business abroadCosts of doing business abroad (CDBA) (CDBA) • Zaheer (1995) introduced the notion of Zaheer (1995) introduced the notion of

the the liability of foreignnessliability of foreignness (LOF) (LOF) – costs due to spatial distance (travel, costs due to spatial distance (travel,

transportation; coordination over transportation; coordination over distance/time zones) distance/time zones)

– firm-specific costs (unfamiliarity; lack of roots firm-specific costs (unfamiliarity; lack of roots in local environment)in local environment)

– host country environment costs (lack of host country environment costs (lack of legitimacy, economic nationalism)legitimacy, economic nationalism)

– home country environment costshome country environment costs

• LOF was deemed synonymous with CDBALOF was deemed synonymous with CDBA • Several scholars developed this stream Several scholars developed this stream

furtherfurther

– Zaheer & Mosakowski (1997) – MNEs not being Zaheer & Mosakowski (1997) – MNEs not being embedded in host country’s information embedded in host country’s information networksnetworks

– Kostova & Zaheer (1999) and Mezias (2002) took Kostova & Zaheer (1999) and Mezias (2002) took an institutional theory perspective - lack of an institutional theory perspective - lack of isomorphism with the host country’s isomorphism with the host country’s institutional environmentinstitutional environment

– Internationalization process research scholars Internationalization process research scholars like like Johanson & Vahlne (1977)Johanson & Vahlne (1977) attributed it to attributed it to the lack of knowledge and psychic distance of the lack of knowledge and psychic distance of host country (Upsaala Model)host country (Upsaala Model)

Journal of International ManagementJournal of International Management (2002)(2002)

Special Issue on the Liability of Special Issue on the Liability of ForeignnessForeignness

• Editors - Editors - Luo and MeziasLuo and Mezias - deemed LOF a - deemed LOF a precursor to CDBAprecursor to CDBA

• Sethi & GuisingerSethi & Guisinger argued that LOF is a subset argued that LOF is a subset of CDBAof CDBA

• Zaheer Zaheer acknowledged that earlier she acknowledged that earlier she considered LOF to be synonymous with CDBA considered LOF to be synonymous with CDBA but now she feels the two are differentbut now she feels the two are different

• Organizational learning - Organizational learning - Petersen & PedersenPetersen & Pedersen• Evolutionary dynamics - Evolutionary dynamics - Hennart, Roehl & Hennart, Roehl &

ZengZeng• Socioeconomic theory - Socioeconomic theory - Luo, Shenkar & NyawLuo, Shenkar & Nyaw

Glaring Differences in Scholarly Glaring Differences in Scholarly Perceptions Perceptions

• Fragmented picture of the phenomenonFragmented picture of the phenomenon• Confusion over the LOF – CDBA Confusion over the LOF – CDBA

RelationshipRelationship• Dyadic context of only the host Dyadic context of only the host vsvs home home

countries countries • Over-emphasis on CDBAOver-emphasis on CDBA• Benefits accruing to MNEs are not Benefits accruing to MNEs are not

integratedintegrated• Highlighted need for a holistic Highlighted need for a holistic

conceptualization conceptualization

Phenomenal Changes in the Phenomenal Changes in the Global Business EnvironmentGlobal Business Environment

• Hostility towards MNEs and FDIHostility towards MNEs and FDI during the 50s and 60sduring the 50s and 60s• Economic imperialism Economic imperialism (S(Sovereignty at Bay - overeignty at Bay - Vernon Vernon

1971)1971)• Polarization due to Cold War, sheen of socialist economyPolarization due to Cold War, sheen of socialist economy• Dramatic changes since the 80s - economic Dramatic changes since the 80s - economic

liberalization, collapse of Soviet Union, technological liberalization, collapse of Soviet Union, technological developmentsdevelopments

• Global trade increased 25-fold since 1970 and is now Global trade increased 25-fold since 1970 and is now 25% of world GDP (UNCTAD, 2004)25% of world GDP (UNCTAD, 2004)

• FDI increased 279% between 1992 and 2002FDI increased 279% between 1992 and 2002 • Multi-country operations and global alliances – have Multi-country operations and global alliances – have

implications on the costs as well as benefits to MNEsimplications on the costs as well as benefits to MNEs

Reappraising Liability of Reappraising Liability of Foreignness Foreignness

• LOF – LOF – additional costs of foreign firm relative to host countryadditional costs of foreign firm relative to host country rival rival

• Purely dyadic context – home vs host countryPurely dyadic context – home vs host country

• Notion of host country and relative costs ? – Notion of host country and relative costs ? – examplesexamples

• Discriminatory regulations, prejudice – formidable & Discriminatory regulations, prejudice – formidable & debilitatingdebilitating substantially reduced due to economic liberalizationsubstantially reduced due to economic liberalization

• Incidental – cultural differences, lack of information and roots Incidental – cultural differences, lack of information and roots

alsoalso reducing due to trend towards joint ventures, reducing due to trend towards joint ventures, alliancesalliances

• Costs outside the dyadic context - due to multilateral linkages Costs outside the dyadic context - due to multilateral linkages

• Distinction essential since their sources, magnitude and Distinction essential since their sources, magnitude and mitigating factors are quite differentmitigating factors are quite different

• CDBA has two componentsCDBA has two components– traditional LOF (dyadic context)traditional LOF (dyadic context)– a new notion Liability of Multinationalitya new notion Liability of Multinationality (LOM)(LOM)

Liability of Multinationality (LOM)Liability of Multinationality (LOM)

• Costs incurred outside the host country environment Costs incurred outside the host country environment – Ford’s Chinese subsidiary ‘s LOF and LOMFord’s Chinese subsidiary ‘s LOF and LOM

• Coordination costs of multi-country operations across Coordination costs of multi-country operations across spatial distance and multiple time zonesspatial distance and multiple time zones

• Transacting with MNE’s global network of subsidiaries Transacting with MNE’s global network of subsidiaries and alliances - and alliances - costs of different Microsoft subsidiaries costs of different Microsoft subsidiaries

• Hedging against exchange rate volatilityHedging against exchange rate volatility• Monitoring regional and global business environmentMonitoring regional and global business environment• Monitoring multilateral institutions (WTO, IMF, EU)Monitoring multilateral institutions (WTO, IMF, EU)• Opportunity costs of missed multi-point pricing Opportunity costs of missed multi-point pricing

optionsoptions

Conceptual FrameworkConceptual Framework

• Disaggregating CDBA into LOF and LOM reflects the Disaggregating CDBA into LOF and LOM reflects the scale, scope and complexity of global business todayscale, scope and complexity of global business today

• Current International Business literature presents an Current International Business literature presents an imbalanced view of FDI – imbalanced view of FDI – overemphasizes Costsoveremphasizes Costs

• BenefitsBenefits not integrated in a holistic conceptualizationnot integrated in a holistic conceptualization• Institutional economics literature analyzes only the Institutional economics literature analyzes only the

benefits of economic development to host countriesbenefits of economic development to host countries• Conceptual framework integrates Conceptual framework integrates costscosts as well as as well as

benefits benefits – both in – both in dyadicdyadic as well as as well as multilateralmultilateral contextscontexts

• The 2 x 2 matrix introduce two more notionsThe 2 x 2 matrix introduce two more notions– Assets of Foreignness (AOF)Assets of Foreignness (AOF)– Assets of Multinationality (AOM)Assets of Multinationality (AOM)

Host Country ContextHost Country Context Multinational ContextMultinational Context

CostCostss

I. Liability of Foreignness I. Liability of Foreignness (LOF)(LOF)

Economic nationalism, Economic nationalism, prejudiceprejudice

Host government Host government restrictionsrestrictions

Lack of local informationLack of local informationCultural differencesCultural differencesLack of local Lack of local

relationshipsrelationshipsLack of isomorphism with Lack of isomorphism with

local institutional local institutional environmentenvironment

II. Liability of Multinationality II. Liability of Multinationality (LOM)(LOM)

Spatial distance, multiple Spatial distance, multiple

time zonestime zones

Transacting with global Transacting with global

network of subsidiaries and network of subsidiaries and

alliancesalliancesHedging - exchange rate Hedging - exchange rate volatilityvolatilityMonitor global business Monitor global business environmentenvironmentMonitoring policies of Monitoring policies of NGOs, WTO, IMF, and NGOs, WTO, IMF, and regional economic groupsregional economic groups

BenefiBenefitsts

III. Assets of Foreignness III. Assets of Foreignness (AOF)(AOF)

Incentives from host Incentives from host governmentgovernment

Proprietary tech; brand Proprietary tech; brand equityequity

First-mover advantagesFirst-mover advantages

Ability to influence Ability to influence national legislation and national legislation and policypolicy

Ability to leverage Ability to leverage domestic learning into a domestic learning into a new contextnew context

IV. Assets of IV. Assets of Multinationality (AOM)Multinationality (AOM)

Leverage international Leverage international alliances and networks.alliances and networks.

Leveraging of knowledge Leveraging of knowledge from MNE’s subsidiaries.from MNE’s subsidiaries.

Leverage multipoint pricing Leverage multipoint pricing options.options.

Strength of international Strength of international strategic presence and strategic presence and staturestature

Conceptual FrameworkConceptual Framework