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Giáo trình international business strategy theory and practice

International Business Strategy

With stagnated demand in many home economies, the need to internationalize and exploit foreign
market opportunities has never been more paramount for businesses to succeed at a global level.
However, this process raises a number of questions, such as: Can firms use their knowledge of one
market in the next? Can firms pursue internationalization on several fronts at the same time? How
should firms handle cultural and institutional differences between markets?
This textbook provides students with the core research in international business strategy, including
organization, efficiency, external relationships and the challenges found in an increasingly
multicultural world. Each part begins with a presentation of the issues and controversies faced in that
particular area, followed by a synthesis of the research, which provides avenues for future research.
To facilitate and encourage further debate and learning, each part also includes at least one original
case study.
Compiled by two world-leading scholars of international business, and supplemented with critical
commentaries and a range of integrative case studies, this comprehensive textbook provides advanced
students of international business strategy with a resource that will be invaluable in their studies and
Peter J Buckley is Professor of International Business at the University of Leeds, UK.
Pervez N Ghauri is Professor of International Business at Kings College London, UK.

International Business Strategy
Theory and practice

Edited by
Peter J Buckley and Pervez N Ghauri

First published 2015
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2015 Peter J Buckley and Pervez N Ghauri
The right of the editors to be identified as the authors of the editorial material, and of the contributors for their individual chapters, has
been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other
means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without
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Every effort has been made to contact copyright holders for their permission to reprint material in this book. The publisher would be
grateful to hear from any copyright holder who is not here acknowledged and will undertake to rectify any errors or omissions in future
editions of this book.
Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and
explanation without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging in Publication Data
International business strategy: theory and practice/edited by Peter J. Buckley and Pervez Ghauri.
pages cm
1. International business enterprises–Management–Cross-cultural studies–Case studies. 2. International trade–Case studies. I.
Buckley, Peter J., II. Ghauri, Pervez N.,
HD62.4.I5496 2014
ISBN: 978-0-415-62469-5 (hbk)
ISBN: 978-0-415-62470-1 (pbk)
ISBN: 978-1-315-84836-5 (ebk)
Typeset in Times New Roman
by Sunrise Setting Ltd, Paignton, UK


List of figures
List of tables
List of contributors
Basic concepts of international business
1 Introduction
2 The foreign investment decision process

3 International investment and international trade in the product cycle

4 The Uppsala internationalization process model revisited: from liability of foreignness to
liability of outsidership

5 The eclectic paradigm as an envelope for economic and business theories of MNE activity

6 The internalisation theory of the multinational enterprise: a review of the progress of a
research agenda after 30 years

Case study I: Internationalization of brewery companies: the case of Carlsberg

Global strategy
7 Introduction
8 Globalisation, economic geography and the strategy of multinational enterprises

9 Semiglobalization and international business strategy

10 Do regions matter? An integrated institutional and semiglobalization perspective on the
internationalization of MNEs

11 Do managers behave the way theory suggests? A choice-theoretic examination of foreign
direct investment location decision-making

12 Towards more realistic conceptualisations of foreign operation modes

Case study II: Danone: a French multinational expanding into the global market

Organizing the multinational enterprise
13 Introduction
14 Organizing for worldwide effectiveness: the transnational solution

15 Firm resources and sustained competitive advantage

16 Knowledge, bargaining power, and the instability of international joint ventures

17 Mimetic and experiential effects in international marketing alliance formations of US
pharmaceuticals firms: an event history analysis

Case study III: Renault–Nissan–Daimlar: a global strategic alliance

External relationships
18 Introduction

19 Overcoming the liability of foreignness

20 Down with MNE-centric theories: market entry and expansion as the bundling of MNE and
local assets

21 Network view of MNCs’ socio-political behavior

22 Weight versus voice: how foreign subsidiaries gain attention from corporate headquarters

Case study IV: Axis communications: building the global market for network surveillance

Culture and international business
23 Introduction
24 Cultural distance revisited: towards a more rigorous conceptualization and measurement of
cultural differences

25 Transforming disadvantages into advantages: developing-country MNEs in the least
developed countries

26 Merging without alienating: interventions promoting cross-cultural organizational
integration and their limitations

27 Psychic distance and buyer–seller interaction

Case study V: UniCredit Group: a bank goes East

Emerging markets

28 Introduction
29 The determinants of Chinese outward foreign direct investment

30 Market driving multinationals and their global sourcing network

31 Strategies that fit emerging markets

32 The hidden risks in emerging markets

Case study VI: Internationalization of Indian pharmaceutical multinationals




Development of production units
The basic mechanism of internationalization: state and change aspects (Johanson & Vahlne, 1977: 26)
The business network internationalization process model (the 2009 version)
The firm and its external relationships
Porter’s competition framework
Different strategic choices
Internationalisation of firms: conflict of markets
‘Hub and spoke’ strategies: an example
The global factory
Exports divided by GDP
Actual vs perfect product market integration through trade
Actual vs perfect product market integration through FDI
Standard deviation of nominal return differentials
Convergence? GDP per capita across economic groups, 1950–1997 (PPP-adjusted)
Propensity scores to internationalize into a country computed on the four institutional variables
Example of an investment choice option
Example of the best–worst experiment
Aggregate best–worst experiment results
Mode comparisons?
Mode choice and change
The organizational structure of Danone
Structures based on functions
Structure based on products in an international company
A matrix structure
Integrated network
The relationship between traditional “strengths-weaknesses-opportunities-threats” analysis, the resource based model, and models of
industry attractiveness
The relationship between resource heterogeneity and immobility, value, rareness, imperfect imitability, and substitutability, and
sustained competitive advantage
Boundaries of the article: partner knowledge, bargaining power, and the instability of International Joint Ventures (IJVs)
Instability of the International Joint Ventures (IJV) and the foreign partner’s bargaining power
Knowledge acquisition and instability
Conceptual framework
Smoothed hazard rate estimates
Covariate effects on pooled hazard rate
Minority equity stakes of the Renault–Nissan–Daimler alliance
Presentation of the Alliance Board of Renault–Nissan (in 2013)
Interaction between MNEs and socio-political actors
The firm and its external relationships
Hennart’s (1988) model of equity joint ventures
Optimal mode of foreign market entry
Greenfields, acquisitions and joint ventures


Two types of equity joint ventures: (a) greenfield equity joint ventures; (b) partial acquisition equity joint ventures
A conceptual view of socio-political behaviour of MNCs
Socio-political behavior – gaining legitimacy
DMC in its socio-political network
Vattenfall in its EU, socio-political network
Mutual interdependence between business and socio-political actors
Conceptual framework
Moderating effect of geographic distance
Moderating effect of downstream competence
The indirect business model used by Axis communications
Axis logo
Qualitative/quantitative data collection method
Between-methods triangulation: tensions, contradictions and synergies
Illustration of gaps between perceptions
Interaction and psychic distance
First-time market entries of UniCredit Group, HVB Group and their predecessor institutions in CEE
Market shares of UniCredit Group in major CEE countries after the merger
A model based upon market driving and networking factors
A conceptual model of market driving firm and its relationship with suppliers



Theories explaining O specific advantages of firms. A: Group 1 Explaining Static O advantages
Theories explaining O specific advantages of firms. B: Group 2 Explaining Dynamic O advantages
Theories explaining L specific advantages of countries
Theories explaining why firms choose to own foreign value added facilities
Buckley and Casson contributions
Buckley and Casson contributions by area
Different strategic approaches and configuration of assets and competences
Global and local operation
Winners and losers from the globalisation of capitalism
Dimensions of integration
Commodity composition of US merchandise trade
Outward FDI stock as a percentage of GDP
Size of net capital flows since 1870 (mean absolute value of current account as percentage of GDP, annual data)
Strategy domains
Descriptive statistics and pairwise correlations
Results of the models explaining an MNE’s degree of internationalization into a country over the period 1996–2001
Sample and respondent characteristics
Investment features and levels used in the choice experiment
Environment and investment level conditions
Characteristics of last investment made
Propensity to choose any investment (percentage of all investments presented)
Aggregate consider and invest models
Consider and invest models split by manager’s FDI experience
Consider and invest models split by market stability
Differences in individual BW scores split by manager’s FDI experience
Comparison between BW and individual level DCM estimates of preference ordering (absolute correlations)
Danone’s ten leading markets in 2000 and 2012
Strategy, structure and control
Descriptive statistics
Partial likelihood estimates of covariate effects on the propenisity to engage in a new international alliance
Partial likelihood estimates of covariate effects on the propensity to engage in a new culturally close international alliance
Partial likelihood estimates of covariate effects on the propensity to engage in a new culturally distant international alliance
Exponentially transformed estimates
Key Figures of Renault, Nissan and Daimler (2012)
Descriptive statistics for subsamples
Descriptive statistics and correlations of signed distance measures
Descriptive statistics and correlations of absolute distance measures
Results of regression analyses for liability of foreignness
A summary of the firms’ political activities
Results of CFA model for attention
CFA Model for Profile Building
Means, standard deviations, and correlations


Results of OLS regressions analyses
Evolution of developing-country MNEs, 1990–2003
Selective descriptive statistics for the least developed countries
Variables, measures, and sources of data
Summary statistics and correlation matrix
Results of random-effect Tobit analyses of determinants of prevalence of developing-country MNEs among largest affiliates of
foreign firms in LDCs
Foreign direct investment in the least developed countries
Measures indicating alienation: veterans
Repeated-measures MANOVA predicting attitudes from time
Repeated-measures MANOVA predicting from hierarchy and time
Repeated-measures MANOVA predicting from having a Japanese supervisor at Time B, Time C, and being sent to Japan: all three
Departmental means at three time points: searching for pockets of alienation
UniCredit Group’s leading position in CEE countries in 2012
Key stages in Chinese ODI policy development
Approved Chinese FDI outflows, by host region and economy, 1990–2003 (US$10,000 and %)
The determinants of Chinese ODI
Correlation matrix
Variance inflation factor test
Results for the determinants of Chinese ODI
Critical network factors in developing the market driving supplier relationships
Top 10 Indian pharmaceutical multinationals (in Indian Rupees (billion)) for the financial year 2012–13


Christoph Barmeyer (University of Passau, Germany)
Ulf Elg (Lund University, Sweden)
Jens Gammelgaard (Copenhagen Business School, Denmark)
Sylvie Hertrich (EM Strasbourg, University of Strasbourg, France)
Michel Kalika (Dauphine University, France)
Thomas Kotulla (ESCP Europe, Germany)
Ulrike Mayrhofer (IAE Lyon, France)
Surender Munjal (Leeds University, UK)
Janina Schaumann (Lund University, Sweden)
Stefan Schmid (ESCP Europe, Germany)
Dennis J. Wurster (ESCP Europe, Germany)

Part I

Basic concepts of international business

1 Introduction

What is international business?
At its simplest, international business is easily defined: doing business across international frontiers.
As this book will show, in practice this is far from simple. There are many methods (modes) for
companies to engage in business internationally and the management and coordination of these
complex activities has become a specialized field of study as “international management”.
The academic subject of international business approaches the empirical phenomena of doing
business across borders at a variety of levels of analysis, using a variety of theoretical frameworks
(Buckley and Lessard, 2005). The most important levels of analysis are:

the individual manager;
the firm;
the industry;
the country;
the global economy.

In each category, there is great heterogeneity.
Over the history of international business, different phases of research dominance have led to one
level or another being privileged in order to give clarity to the analysis. For instance, internalization
theory (Chapter 6) and the product cycle hypothesis (Chapter 3) privilege the level of the firm.
Analyses of global strategy emphasize the industry level and institutional analysis has the macroenvironment as its core. Individual managers, too, have been studied, investigating their decisionmaking (Chapter 11) and often the impact of national cultures on their attitudes and style (Chapters 25
and 26).
In order to reconcile these differing levels of analysis, the international business research
community has often focussed on a “big question”. This has included explaining the flows of foreign
direct investment (FDI), exploring the existence, strategy and organization of multinational enterprises
(MNEs) and understanding and predicting the development of the internationalization of firms and
globalization. It is arguable that the current (2014) big question is the rise of emerging economies,
particularly the BRIC countries (Brazil, Russia, India and China) and the impact this has on the
international economy, not least by their outward FDI. All these themes are examined in this book.
The domain of international business research is given by its empirical subject matter.
“International” implies comparative. It is the international heterogeneity and variance of business
activity that gives the subject matter its inherent interest and importance; international business is
imbued with comparative method. The key comparators are: geographical, across space; historical,
across time; counterfactual, a thought experiment comparing different (hypothetical) conditions of the

The geographical comparison is the most obvious for international business; comparisons across
nations are fundamental to its raison d’être. This has great advantages for the research area and for
its central factor, the multinational enterprise, because this is a single firm operating in more than one
country. The MNE performs an experimental function holding “firm” constant and varying “context”.
We can see that a firm (and its managers) may behave differently, respond to different stimuli and
take different decisions according to the geographical space in which it is operating. This type of
analysis need not only operate at the national level; it is important, for instance, in comparing cities,
often the key factor in location decisions.
The second key comparison is historical time. Firms that are “successful” in time (t) are not
necessarily successful in time (t+l) and “loss of competitiveness” over time is a major issue for
countries, regions, cities, firms and economic blocs. Concepts of growth, development, decline and
loss all have a temporal element. Combining analyses of firms and industries over space and time are
key contributors of international business theory.
Examining counterfactual positions is a challenging process. What would have happened if Nissan
had not invested in the UK? Nothing? An investment by another foreign company? An investment by a
UK company? The UK market being served by exports from Japan rather than a local output of cars?
All these are theoretical possibilities and the judgement and analysis of the researcher is required to
specify which is the most feasible alternative. On this judgement hangs our view of whether Nissan’s
investment was a “good thing” (because it created new economic activity in the UK) or a “bad thing”
(because it diverted productive capacity from UK ownership to foreign ownership). Note that the
judgement here depends on whose welfare we are considering: the UK, Japan, the firm, Nissan, local
workers, the consumers of cars and the British and Japanese governments are just some of the actors
on whom we may analyse the impact of the investment.
It will have been noted that the analysis of international business requires an interdisciplinary
approach. Not only are social sciences, such as economics and sociology, necessary to encompass the
impacts of international business, but so too are history and geography. Understanding and reducing
complexity is an important task for the international business scholar.

International trade and investment
International business has centred on the actions and outcomes of decisions by firms operating across
borders. There is a long tradition of international economics examining trade: flows of goods and
services exported and imported across national frontiers. This tradition largely abstracted from the
institution of the firm. It was a focus on the firm as an institution that undertakes not only trade but
also investment across borders that created international business as a distinct subject. This was
allied to the distinction between direct foreign investment where the firm owns and controls an entity
in the host country (the one receiving the investment), thus giving the source countries (investing)
parent firm control over part of a foreign country’s economic activity as distinct from portfolio
foreign investment, where a source country entity simply acquires a non-controlling share of a foreign
firm. This distinction (first made by Stephen Hymer in 1960, published 1976) propelled the firm and
its major international competitive weapon – foreign direct investment – to centre stage in the global
From this sharp distinction between FDI and portfolio foreign investment, grew a literature on

foreign entry and development analysis at the level of the firm. This strand of research compares
exporting, FDI and foreign licensing as means of competing in the world economy. The choice of
“foreign entry modes” is made up of the interaction between two critical decisions. These are: where
is an activity to be located and how is the activity to be controlled? We should remember that firms
coordinate far more activities than just production and service performance. They also carry out
marketing, financing, research and development (R&D), human resource management (HRM) amongst
others. All these activities have (different) optimal locations and means of control that change over
time, meaning the MNE is the major dynamic factor in the world economy.
The use by firms of trade (exporting and importing) and foreign investment raises the strategic
issue of the means (often called modes of international operation) by which firms service foreign
markets. This must be preceded by the question of why firms venture abroad.

Why firms engage in international business
The reason firms venture abroad is simple: they do so to obtain things that are not available at home.
Firms import goods and services, labour, technology, skills and inputs that are unavailable or more
expensive at home. The analogue of this is that firms export a similar portfolio of goods, services and
assets because foreigners cannot obtain these things at all or as cheaply at home.
It has become traditional to examine the motives for foreign direct investment into:

market seeking;
resource seeking (more generally, locationally fixed input seeking);
efficiency (lower cost) seeking;
asset seeking.

This represents a set of factors that are not transferable from the foreign country, they are locationally
fixed. If they were not locationally fixed then they could be transferred internationally by trade or
licence and there would be no need to undertake foreign investment. Moreover, foreign direct
investment is preferred because this allows the investor to control the resources. Markets, natural
resources or inputs, cheap labour (or a lower tax rate) and certain types of locationally fixed assets
are the target and control of these is the key reason for FDI.
So far, we have considered only a two-country world (home and foreign). FDI becomes more
complicated when we add a third country (or third countries more generally) because we can then
consider an “offshore base” which is neither the home country (source country from which the
investment comes) or target market. It may be considered an entrepôt where activities are carried out
on behalf of Country 1 with a target market that may be Country 1 or 2. Offshore bases in large
countries (for example, China) may also service their own market as well.
Dynamics are extremely important in global strategies. As cost and market conditions shift and are
affected by a myriad of causes, including wage rates, transportation rates, exchange rates, tax rates, so
do location decisions. Over time, we observe shifts of whole industries and types of activity between
locations. This affects the welfare of home, host, third countries and the international economy. The
shifting of locations, in particular in response to changes in tax rates, are a significant source of
political controversy.

How firms engage in international business: modes of doing business abroad
There are three basic (or generic) modes of doing business internationally: exporting, foreign
licensing and foreign direct investment. Each of these modes has a variety of sub-types including
direct exporting, exporting through an agent or distributor, licensing, franchising, turn-key operations,
assembly, sales subsidiary and production subsidiary.
This is further complicated by the ownership dimension: should these activities be wholly owned
or jointly owned with others? Joint ownership includes joint ventures (equity or non-equity),
alliances (which may imply joint equity shares or no ownership commitment) or minority joint
Initial entry into the foreign market may be by acquisition, often referred to as “mergers and
acquisitions” (M&A) even though the number of mergers – two companies joining together – is rare
in practice, or by “greenfield ventures” where a de novo entry is made, all the required assets are put
together from scratch. Further development in the foreign market may be by acquisition or organic
“Entry and development” strategy is complex and has several dimensions: ownership strategy,
entry strategy and growth strategy. All are predicated on picking the optimal location. Where this
ceases to be optimal, MNEs will require exit strategies involving disinvestment.
Internationalization (and de-internationalization) has a time dimension, a dynamic, a sequencing of
strategic moves that is complex and subject to a wide range of influences from the firm itself and from
its environment. Analyses of internationalization have to take cognizance of this complexity either by
simplification (in a theoretical context) or by “thick description” in insightful case studies.
The first part of this collection covers key articles, introducing basic concepts that have had a
fundamental effect on subsequent research and writing.
The first reading in this volume, Chapter 2, is an abridgement (by Peter Buckley) of Yair Aharoni’s
1966 study of the foreign investment decision process. The foreign investment decision is analysed as
a complex social process which is influenced by social relationships within and outside the firm.
Aharoni provides a rich description of individual and organizational behaviour over time and shows
the crucial effect of perception and uncertainty in the course of this process. A holistic understanding
of all the stages is necessary to comprehend the decision. Although Aharoni analyses the decision as a
succession of stages, he is at pains to point out that in real life these stages are ill-defined and messy.
This piece emphasizes the importance of the initiating force and explains many elements that may be
wrongly labelled “irrational”. Aharoni’s work laid a firm foundation for studies of decision
processes in multinational firms.
Chapter 3 is a work which can justly claim the epithet “seminal”, Raymond Vernon’s 1966 article
“International investment and international trade in the product cycle”. The argument of this paper is
that firms are highly stimulated by their local environment and are more likely to innovate when their
immediate surroundings are more conducive to the creation of (particular) new techniques or
products. For internationalization to occur, these innovations must be transferable to other economies.
In adapting to its market, the firm moves through stages from innovation to standardization and
maturity according to the developing forces of supply and demand for its product. This model of
sequential decision-making has had a great influence on internationalization theory. The model was
originally developed to explain US investment in Europe and in cheap labour countries. Its usefulness

goes beyond Vernon’s reappraisal of its efficacy under changed world conditions (1979) or the sting
of its critics (for example, Giddy, 1978). 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. In some ways, its powerful, yet simple, dynamic resting on the changing equilibria of
demand and supply over time, has never been bettered. The twin rationales of cost imperatives and
market pull are simply explained in Vernon’s model. Its programmatic nature may have strait jacketed
later analyses into a unilinear internationalization path. 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 marketing.
Chapter 4 is Johanson and Vahlne’s 2009 revisiting of the Uppsala internationalization process
model. The original model, published in 1977 (Johanson and Vahlne, 1977), was reproduced in
earlier versions of this book (Buckley and Ghauri (eds.) 1993, 1999). In the original piece the authors
examined the internationalization process by investigating the development of knowledge and the
building of a commitment within the firm to foreign markets. The twin notions of increasing
knowledge of foreign markets as a means of reducing uncertainty and the creation of a commitment to
foreign ventures had been examined in a key study by Aharoni (1966) (see Chapter 2) and the authors
tied these notions to the framework of the behavioural theory of the firm. Internationalization is again
envisaged as the product of a series of incremental decisions. Decisions taken at a point in time affect
subsequent steps in the process. Psychic distance is invoked and is defined as “the sum of the factors
preventing the flow of information from and to the market”. The decision-making process is
dependent on the firm’s previous experience. Again, the empirical evidence is based on a small
number of companies. Four Swedish companies are examined from Johanson and Wiedersheim-Paul
(1975), a case study of the Swedish pharmaceutical firm Pharmacia is introduced and other industry
studies are quoted (special steel, pulp and paper and nine further cases). Casual empirical evidence
from other countries is also adduced. The two notions of market commitment and market knowledge
entered the literature as key elements of internationalization. The updated 2009 paper emphasizes the
international business environment as a “web of relationships, a network, rather than as a
neoclassical market with many independent suppliers and customers”. The root of uncertainty is
“outsidership” to these networks rather than psychic distance (see Chapter 27). Trust-building and
knowledge-creation are added to commitment-building and opportunity-development as critical
change mechanisms. The celebrated establishment chain is felt to have declining validity in the
context of extended (international) business networks. The establishment chain was introduced when
Johanson and Wiedersheim-Paul (1975) examined the internationalization of four Swedish firms. For
this small sample, they found a regular process of gradual incremental change. The firm progresses
from no regular exports to export through independent representatives and the establishment of sales
subsidiaries to the establishment of production facilities. Flows of information between the firm and
the market are (as in Vernon’s model) crucial in this process and the cultural distance between
spatially separated units of the firm is termed psychic distance. The establishment profiles of the four
firms were mapped across a number of countries in time and the gradualist pattern was confirmed.
Johanson and Wiedersheim-Paul’s path-breaking article gave rise to considerable controversy
centred on the general applicability of the findings and the underlying theory. Suggestions were made
that experienced firms can “jump” stages and transfer learning from one market to another without
having to go through each stage in each foreign market. The knowledge collection and planning

processes of large multinationals can, some authors feel, obviate the need for incremental learning.
Some empirical findings suggest a less gradualist and one-directional expansion path. The theory has
also been questioned in its classification of stage or stages of involvement ranked in order of “depth”.
Is a licensing deal a deeper form of involvement than a foreign agency agreement? Methodologically,
looking back in time a successful firm eliminates firms that have failed at an earlier stage, i.e. it
induces a bias towards longer routes of establishment. More carefully designed experiments are
required to establish the conditions under which a stages approach is valid. Here, the authors draw
parallels and contrasts with internalization theory (see Chapter 6) and the eclectic paradigm (see
Chapter 5). The most recent version of the Uppsala School has strong parallels with the analysis of
the global factory (Chapter 8) although readers will be able to identify the contrasts of the two
John Dunning has produced a large corpus of work in international business (see the encyclopaedic
Dunning and Lundan, 2008). From them, we have chosen a piece originally written in 2000 (Chapter
5), which presents the key elements of Dunning’s “eclectic paradigm”. This approach uses three sets
of explanatory factors to analyse international business issues: locational factors, internalization
factors and ownership factors. Firms transfer their ownership-specific assets to combine with the
most favourable sets of traditionally fixed elements in the global economy, and they do this, where
appropriate, internally, in order to retain control of the revenue generation. Later versions of the
eclectic approach refined this position and extended its taxonomy and it has become familiar to many
generations of researchers and students as a set of key organizing principles in international business.
The dominant paradigm in research on the multinational firm is the internalization approach.
Chapter 6 is a summary and review of the theoretical work in this tradition by Buckley and Casson
whose book, the Future of the Multinational Enterprise (1976), was a basic contribution. The basic
theory explains the division of national markets (and therefore of the world market) between domestic
firms and foreign multinationals. It does so by reference to two effects: the location effect and the
internalization decisions of firms. The location effect determines where value adding activities take
place and the internalization effect explains who owns and controls those activities. The concepts of
least cost location and growth by internalization of markets are introduced to internationalization
theory. Firms grow by replacing the (imperfect) external market and earn a return from so doing until
the point at which the benefits of further internalization are outweighed by the costs. The types of
benefit and cost of growth by internalization are listed and it is suggested that certain types of market
are more likely to be internalized than others, given the configuration of the world economy. These
ideas were expanded in Buckley and Casson (1985), Casson (1987) and Buckley (1988, 1989, 1990).
The direction of internationalization can be predicted by predicting changes in cost and market
conditions. These factors are classified as industry specific, region specific, firm specific and nation
specific. The current piece, from 2009, reviews the research agenda pursued by Buckley and Casson
in the forty years since the 1976 book. This agenda has become progressively more wide-ranging,
covering joint ventures (see also Chapters 16 and 17), innovation and the role of culture (see also
Part V).
Chapter 8 was one of the first pieces to introduce the theoretical structure “The Global Factory”
(Buckley, 2004, 2007, 2009, 2010, 2011a, 2011b). It points to the importance (and re-emergence) of
spatial issues in international business theorizing and focusses on the two key decisions for
multinationals: locational spread and the extent of control, mirroring the essential concepts of optimal

location, and internalization and externalization decisions that determine the boundaries of the firm.
The more flexible boundaries of the global factory focus attention on offshoring (a locational choice)
and outsourcing (an externalization decision) and provide links with literatives on these two
important trends (references) and on the cognate literature on “global value chains” (Gereffi and
Memedovic, 2003; Gereffi et al., 2005).

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Buckley, P.J. 1988. Organisational firms and multinational companies. In Wright, M. and S.Thompson, (Eds.), Internal organisation,
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Buckley, P.J. 1989. Foreign direct investment by small and medium-sized enterprises: The theoretical background. Small Business
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Buckley, P.J. 1990. Problems and developments in the core theory of international business. Journal of International Business Studies,
21(4): 657–65.
Buckley, P.J. 2004. The role of China in the global strategy of multinational enterprises. Journal of Chinese Economic and Business
Studies, 2/1, 1–25.
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2 The foreign investment decision process*
Yair Aharoni

Elements in the decision process
In any decision process the following elements can be delineated: first, any one choice made in the
organization depends on the social system in which the process takes place; second, the process,
although not each of the decisions from which it is composed, takes a long time; third, decisions are
made under uncertainty; fourth, organizations have goals; and finally, there are many constraints on
the freedom of action of the decision-makers to be reckoned with.
A system is a set of interrelated parts. Any organization is a system of individuals, grouped in
subsystems according to their role definitions, mutually influencing each other through a continual
process of interactions. However, every participant in the organization is not only an involved
member of the organization. They are intimately connected with the wider variety of other systems of
which they are a part, and which they cannot ignore. The organization as a whole is also part of
superordinate systems: the industry, the community in which it operates, the cultural environment of
which it is a part. All these influence the way problems are defined, alternatives are perceived and
selected, and opinions are formulated. ‘In order to survive, an organization must achieve what is
called “symbiosis” (i.e., the mutually beneficial living together of two dissimilar organizations) with
a variety of external systems.’
The first element in the analysis of any decision process is therefore the organization and
environment in which it takes individuals, each with his own goals and aspirations, and which
influnces place. The decision is made within an organization which has established strategy,
procedures and standard operating policies, which is composed of different individuals, each with
his own goals and aspirations, and which is influenced by other, superordinate systems. The
organization has devised an established ‘way of doing things’ according to agreed-upon goals and
past experience; these rules and specifications influence the behavior of its members, the information
gathered by them and their adaptive reactions to the environment. Moreover, individuals within the
organization. These relations will influence any specific decision.
Those making the decision will have to continue acting for the same organization and interacting
with various people in and outside it long after any specific decision is made or implemented.
Consciously or unconsciously, they will weigh these future relations throughout the decision process.
For example, one may choose a certain course of action because somebody else, to whom one feels
an obligation for a favour done in the past, prefers it.
One may also take a course of action because one feels that another decision will harm future
relations with someone else inside or outside the organization. These future relations are not
necessarily important in terms of the specific decision being considered. They are relevant only if we
look at any one specific decision as part of a whole spectrum; the whole stream of past, present and

future events in the organization. Interdependence is a well-known phenomenon in the theory of
oligopoly: the decision-making of any one entrepreneur depends on his evaluation of his competitors’
activities in the past and a projection of his reactions in the future. The same phenomenon, however,
is common in all walks of life, among friends and collaborators as well as among competitors. The
rationality of behavior is seen only if we observe the whole system instead of concentrating our
attention on one isolated phase of it. For example, the officials of a bank decide to lend money to a
company despite their disapproval of a specific deal, because they ‘look at the total picture’ of
relations with this specific customer. The executives of a company decide to invest in a certain
country against their own business judgement because they were asked to do so by the company’s
largest supplier. They feel that a refusal might hamper their future relations with the supplier with
regard to totally different business deals.
The manner of handling a problem depends strongly on the other activities of the organization. A
problem may be considered important enough for immediate investigation during an inactive period,
but its solution may be delayed indefinitely if many other activities are going on at the same time. An
organization’s executives might not explore a profitable opportunity for investment because they were
busy with other affairs at the time the opportunity presented itself. The same executives would have
vigorously investigated this opportunity at other, less hectic times. As individuals choose to focus
their attention on a problem at one time and ignore it at another, depending on their frame of mind or
other preoccupations. The priorities set on one’s time become an important factor in the decision of
what issues should get attention.
A second important element in the decision process that should be explicitly emphasized is the
time dimension. One of the major arguments to be developed in this book is that this dimension plays
a very important role in the way any one decision made at a specific point in time. Rather, there is a
long process, spread over a considerable period of time and involving many people at different
echelons of various organizations. Throughout this process, numerous ‘subdecisions’ have to be
made. These subdecisions usually reduce the degree of freedom of the decision-making unit, thereby
influencing the final outcome of the process. Throughout the process, the persons involved change
their perception of different variables, numerous shifts in the environment occur, and many changes in
other activities of the organization take place. The decision to invest or reject an investment
possibility is the final one. Any attempt to ‘fold’ this time element into a ‘point decision’ would
create grave distortions in the understanding of the process.
A third element to be reckoned with is uncertainty. Businessmen are not endowed with the faculty
of blissful prescience. They operate in a world of uncertainty. Uncertainty creates anxiety, and
anxiety, we are told by psychologists, is a situation human beings try to avoid. It is not surprising,
therefore, to find that businessmen try to avoid uncertainty as much as possible. They impose plans,
standard operating procedures, industry tradition and uncertainty absorption contracts on that
environment. They achieve a reasonable manageable decision situation by avoiding planning where
plans depend on predictions of uncertain future events and by emphasizing planning where the plans
can be made self-confirming through some control device.
Businessmen not only shy away from uncertainty, they also are not willing to take more than a
certain degree of risk. The risk taken depends on the organization and on role-definition, for
executives are willing to assume only what they consider to be ‘normal business risks’. From our
point of view, the avoidance of risk and uncertainty is a very important factor. For a person or an

organization unfamiliar with foreign investments the uncertainty involved is quite large. Therefore, it
seems advisable to pause momentarily and examine the meaning of these terms.
The first attempt to distinguish between risk and uncertainty was made by Frank H. Knight in 1921
as part of his treatment of profits. ‘Risk’ for Knight is a situation in which the probabilities of
alternative outcomes are known. For example, contingencies that can be insured constitute risk.
Uncertainty, on the other hand, is unmeasurable.
This definition, however, begs the question: what exactly constitutes ‘a quantity susceptible of
measurement?’ For example, is it legitimate to measure probabilities on subjective beliefs or should
only objective phenomena be gauged? Does it make sense to talk about the probability of a unique
event or can probability be measured only when the experiment is repetitive? These and related
questions have been debated for centuries by those dealing with probability and they are still
unsolved. It is often argued that objective probability is a pure mathematical concept that cannot be
found in real life. Therefore, only subjective probabilities must be used. However, when subjective
probabilities are used, the distinction between risk and uncertainty loses much of its sharpness.
Indeed, the Bayesian statisticians have developed theories in which management is conceived as
assigning subjective probabilities to uncertain events, changing these probabilities when additional
information becomes available. Thus, the decision is transformed into one under risk.
For our purposes it seems useful to distinguish between a subjective probability and the degree of
belief in it. We shall therefore define ‘risk’ as the proportion of cases in a subjective joint probability
distribution that falls below a subjectively defined expected minimum. Uncertainty will be used to
refer to the degree of confidence in the correctness of the estimated subjective probability
distribution; the lesser the confidence, the higher the uncertainty.
Note that this definition of risk is not commensurate with the one generally used in economics.
Economists define risk as an estimate of a dispersion of a probability distribution; the greater the
dispersion, the greater the risk. Our definition is nearer the day-to-day use of the word. Risk is the
chance of injury, damage or loss, compared with some previous standard. Uncertainty, on the other
hand, is a feeling of doubt and unreliability.
When businessmen talk about risk, they use this word to include both the subjective probability of
loss, either in absolute terms or in relation to some expectations, and the amount the company may
lose. The loss referred to may be a monetary one, the waste of management time, or the inability to
achieve a specific objective of the company other than profits (for example, the risk of losing
control). When a businessman says that ‘the political risks abroad are high’, he may be referring to
the possibility of losing his freedom of decision-making because of a high degree of government
regulation. Political risks may mean to him a high subjective probability of total or partial loss of the
investment itself because of expropriation, nationalization, or war; they may mean that the unsettled
conditions put the very basis of planning in question and make the work of management more difficult;
or they may be any combination of all these factors.
The subjective evaluation of risk stems from uncertainty. Uncertainty is affected mainly by two
factors; ignorance and perceived changes. Ignorance may prevail either because of lack of
information (i.e., the information is not available at any cost), or because of lack of knowledge (i.e.,
the information exists but the decision-maker does not avail themself of it, either because they do not
know of its existence, or because they do not want or are not able to spend the resources needed to
get it). Perceived changes are conditions where there is a high subjective probability of unsettled or

insecure conditions, which would question the very basis of consistent information.
Uncertainty exists not only in regard to the consequences of alternatives; there is also uncertainty
about the alternatives themselves. Indeed, some authorities on economic development feel that lack of
knowledge about opportunities abroad is a major obstacle to such investments. The responses of
others in the organization and of competitors, governments and other outsiders are also unknown.
Still, there is always some information on similar events that the decision-maker considers similar.
Using this information, decision-makers reach some judgement about the future state of affairs and
their effects. Therefore, one should learn how people behave in the face of uncertainty, how
judgements are formulated when knowledge is inadequate, and when a decision-maker will acquire
more information. Obviously, information on every possible opportunity is not available, and even if
it were, one would have to be interested in such information in order to focus one’s attention on it and
to spend such scarce resources as time and energy to digest it. This brings us back to the question of
In any given business situation, few of the variables are known with precision. There are always
many factors which are not subject to mathematical analysis. Many others can be analyzed
mathematically only on the basis of subjectively arrived at figures. Because of uncertainty, we deal
with perceptions and subjective estimates. No quantitative prediction can be made in an exact,
objective manner. To predict a rate of return, one has to estimate investment costs, production cost,
sales volume and prices, advertising cost etc. All these are unknown and many of them can be only
subjectively estimated. Subjective estimates vary by nature; they also change because of changing
expectations of the kind of pay-off associated with various possible errors. If an executive feels that
the punishment for an error resulting in a loss will be much greater than a reward for success, he will
tend to bias his estimates on the pessimistic side. On the other hand, if he feels that the rewards for
success will be much greater than the penalty for failure, he will have a bias on the optimistic side.
One reacts to facts as one perceives them and to what one infers from this perception. Two
businessmen with the same motives and the same information may infer different things and reach
different conclusions. The following two quotations from the interviews with two businessmen
manufacturing the same product will suffice to illustrate this point:
I know we shall have competition in India. However, you must realize that India is a fast growing
market and one of the largest markets in the world.
Sure, India has a larger population, but they are starving. It will take them another ten years before
they will need another plant.
Needless to say, India is the same country, with the same number of inhabitants and the same size of
gross national product in both cases. It is the perceptions of the two businessmen about the size of the
market in India and the way they evaluate the factual data that are different.
Not only do subjective estimates and perceptions vary, they are also modified with time. Pay-off
expectations and subjective estimates of facts are changed during investigation and to a large extent
because of it. Here again, the time dimension becomes a crucial factor in the decision process.
Additional information can be purchased before a conclusion is reached. Getting additional
information may change perception and subjective estimates, but it costs money and time. Therefore,
it will be bought only if the cost of obtaining it is deemed justified by some crude test. Decisions to

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