 

Superior features of a country that provide unique

benefits in global competition, typically derived from Distinctive assets or competencies of a firm that are
either natural endowments or deliberate national difficult for competitors to imitate and are typically
policies. derived from specific knowledge, capabilities, skills, or
superior strategies.

Classical Theories It can be beneficial

The belief that national prosperity is for two countriesto trade without barriers as long as
the result of a positive balance of trade, achieved by one is relatively more efficient at producing goods or
maximizing exports and minimizing imports. services neededby the other. What matters is not the
Relative absence of restrictions to absolute cost of production but rather the relative
the flow of goods and services between nations. efficiency withwhich a country can produce the
 product.
A country benefits by producing only those 
products in which it has absolute advantage or that it 
can produce using fewer resources tan another 
country. 
How Can Nations Enhance Their
Competitive Advantage?
Contemporary Theories
Three key modern perspectives that help
explain the development of national
competitive advantage are the competitive
advantage of nations, Michael Porter’s
Diamond model, and national industrial
policy.
1. Firm strategy, structure, and rivalry refer to the
nature of domestic rivalry and conditions in a
nation that determine how firms are created,
organized, and managed. The presence of strong
competitors in a nation helps créate and
maintain national competitive advantage.
2. Factor conditions describe the nation’s position in
factors of production, such as labor, natural
resources, capital, technology, entrepreneurship,
and know-how. Consistent
with factor proportions theory, each nation has a
relative abundance of certain factor
endowments, a situation that helps determine
the nature of its national competitive advantage.
3. Demand conditions refer to the nature of home-
market demand for specific products and
services. The strength and sophistication of
buyer demand facilitates the development of
competitive advantages in particular industries.
The presence of highly demanding customers
pressures firms to innovate faster and produce
better products.
4. Related and supporting industries refer to the
presence of clusters of suppliers, competitors,
and complementary firms that excel in
particular industries. The resulting Business
environment is highly supportive for the
founding of particular types of firms. Operating
within a mass of related and supporting
industries provides advantages through
information and knowledge synergies,
economies of scale and scope, and access to
Appropriate or superior inputs.

A concentration of businesses, suppliers, and supporting
firms in the same industry at a particular location,
characterized by a critical mass of human talent, capital, or
other factor endowments.


A proactiveeconomic developmentplan initiated by thegovernment,
often incollaboration with theprivate sector, that aims todevelop or
supportparticular industries withinthe nation.











How Can Internationalizing Firms Gain
and Sustain Competitive Advantage?

FDI-Based Explanations
FDI stock refers to the total value of assets that
MNEs own abroad via their investment
activities.

An explanation of the process by which firms acquire and retain one
or more value-chain activities inside the firm, minimizing the
disadvantages of dealing with external partners and allowing for
greater control over foreign operations.
Monopolistic
Advantage Theory
The firm controls one or more resources, or offers relatively unique
products and services that provide it a degree of monopoly power
relative to foreign markets and competitors.
Dunning’s Eclectic
Paradigm
• Ownership-specific advantages: The firm owns knowledge, skills,
capabilities, processes, or physical assets.
• Location-specific advantages: Factors in individ ual countries
provide specific benefits, such as natural resources, skilled labor,
low-cost labor, and inexpensive capital.
• Internalization advantages: The firm benefits from internalizing
foreign manufacturing, distribution, or other value chain activities.
Non-FDI-Based Explanations
A collaborative
venture is a form of cooperation between two or more
firms. There are two major types: (1) equity-based joint
ventures that result in the formation of a new legal entity;
and (2) non-equity-based strategic alliances in which
firms partner temporarily to work on projects related to
R&D, design, manufacturing, or any other value-adding
activity.
Networks and relational
assets represent the economically beneficial long-term
relationships the firm undertakes with other business
entities, such as manufacturers, distributors, suppliers,
retailers, consultants, banks, transportation suppliers,
governments, and any other organization that can
provide needed capabilities.

In this chapter, you learned about:


The basis for trade is specialization. Each nation spe-

cializes in producing certain goods and services and
then trades with other nations to acquire those goods
and services in which it is not specialized. Life as we
know it would be impossible without international
trade.

Classical explanations of international trade began
with mercantilism, which argued that nations should
seek to maximize their wealth by exporting more than
they import. The absolute advantage principle argues
that a country benefits by producing only those products
in which it has absolute advantage or can produce using
fewer resources tan another country.
The principle of comparative advantage contends that
countries should specialize and export those goods in
which they have a relative advantage compared to other
countries. Nations benefit by trading with one another.
Comparative advantage is based on natural advantages
and acquired advantages. Competitive advantage derives
from distinctive assets or competencies of a firm,
such as cost, size, or innovation strengths, which are
difficult for competitors to replicate or imitate. The
collective competitive advantages of many firms give
rise to competitive advantage in the nation as a whole.
Factor proportions theory holds that nations specialize in
the production of goods and services whose factors of
production they hold in abundance. International product
life cycle theory describes how a product may be invented
in one country and eventually mass-produced in other
countries, with the innovating country losing its initial
competitive advantage. New trade theory argues that
increasing economies of scale determine superior
performance in some industries.


A major recent contribution to trade theory is
Porter’s diamond model, which specifies the four
conditions in each nation that give rise to national
competitive advantages: firm strategy, structure,
And rivalry; factor conditions; demand conditions;
And related and supporting industries. An industrial
cluster is a concentration of companies in the same
industry in a given location that interact closely with
One another, gaining mutual competitive advantage.
Competitive advantage of nations describes how nations
Acquire international trade advantages by developing
specific skills, technologies, and industries.
National industrial policy refers to efforts by
governments to direct national resources to developing
Expertise in specific industries.

The internationalization process model describes how
companies expand into international business gradually,
usually going from simple exporting to the most
committed stage, FDI. Born global firms internationalize
at or near their founding and are part of the emergent
field of international entrepreneurship.


MNEs have value chains that span geographic locations
worldwide. Foreign direct investment means that
firms invest at various locations to establish factories,
marketing subsidiaries, or regional headquarters.
Monopolistic advantage theory describes how companies
succeed internationally by developing resources
and capabilities that few other firms possess.
Internalization is the process of acquiring and
maintaining one or more value-chain activities
Inside the firm to minimize the disadvantages of
Subcontracting these activities to external firms.
Internalization
theory
explains the tendency of MNEs to internalize value-
chain stages when it is to their advantage. The eclectic
paradigm specifies that the international firm should
possess certain internal competitive advantages, called
ownershipspecific advantages, location-specific advantages,
and internalization advantages. Many companies engage
in international collaborative ventures, interfirm
partnerships that give them access to assets and other
advantages held by foreign partners. MNEs also develop
extensive networks of supportive companies such
as other manufacturers, distributors, suppliers, retailers,
banks, and transportation suppliers.
Advanced Economies, Developing Economies,
and Emerging Markets

Post-industrial countries characterized by high percapita income,
highly competitive industries, and well-developed comercial
infrastructure.

Low-income countries characterized by limited industrialization and
stagnant economies.

Former developing economies that have achieved substantial
industrialization, modernization, and rapid economic growth since
the 1980s.
Advanced Economies
Advanced economies have democratic, multiparty
systems of government. Their economic systems are
usually based on capitalism. They have tremendous
purchasing power, with few restrictions on international
trade and investment. They host the world’s largest
MNEs.
Developing Economies
Consumers in developing economies have low
discretionary incomes; the proportion of personal
income they spend on purchases other than food,
clothing, and housing is very limited. Approximately 17
percent of citizens in developing economies live on less
than
Emerging Market Economies

A subset of emerging markets that evolved from centrally planned
economies into liberalized markets.

Transfer of state-owned industries to private concerns.

Top firms from emerging markets that are fast becoming key
contenders in world markets.
What Makes Emerging Markets
Attractive for International Business
Emerging markets are attractive to internationalizing
firms as target markets, manufacturing bases, and
sourcing destinations.
Emerging Markets as Target Markets
Emerging markets have become important target
markets for a wide variety of products and services. The
largest ones have doubled their share of world imports
in the last few years. Exports to such countries account
for one-third of total merchandise exports from the
United States. The growing middle class in emerging
markets implies rising demand for various consumer
products, such as electronics and automobiles, and
services such as health care.
Emerging Markets as Manufacturing
Bases These markets are home to low-wage, high-
quality labor for manufacturing and assembly
operations. In addition, some emerging markets have
large reserves of raw materials and natural resources.
Emerging Markets as Sourcing
Destinations
In recent years, companies sought ways of transferring
or delegating non-core tasks or operations from in-house
groups to specialized contractors. This business trend is
known as outsourcing—the procurement of selected
value-adding activities, including production of
intermediate goods or finished products, from
independent suppliers or company-owned subsidiaries.
Outsourcing helps foreign firms become more efficient,
concentrate on their core competencies, and obtain
competitive advantages. When sourcing relies on foreign
suppliers or production bases, it is known as global
sourcing or offshoring
The procurement of selected value-adding activities,
including production of intermediate goods or finished products,
from independent suppliers.
The procurement of products or services from
independent suppliers or company-owned subsidiaries located
abroad for consumption in the home country or a third country.
Assessing the True Potential of Emerging
Markets
Unique country conditions such as limited data,
unreliable information, or the high cost of carrying out
market research can make it challenging for Western
firms to estimate the true market potential of emerging
markets. Often firms may have to improvise.
To overcome these challenges, in the early stages of
market research, managers examine three important
statistics to estimate market potential: per-capita income,
size of the middle class, and market potential indicators.
Per-Capita Income as an Indicator of
Market Potential
When evaluating the potential of individual markets,
managers often start by examining aggregate country
data, such as gross national income (GNI) or per-capita
GDP, expressed in terms of a reference currency such as
the U.S. dollar.


An adjustment for prices that reflects the amount of goods that
consumers can buy in their home country, using their own cur- rency
and consistent with their own standard of living.
Middle Class as an Indicator of Market
Potential
In every country, the middle class represents the
segment of people between wealthy and poor. They
have economic independence; work in businesses,
education, government, and hourly jobs; and consume
many discretionary items, including electronics,
Risks and Challenges of Emerging Markets
Political Instability
The absence of reliable or consistent governance from
recognized government authorities adds to business
costs, increases risks, and reduces managers’ ability to
forecast business conditions. Political instability is
associated with corruption and weak legal frameworks
that discourage inward investment and the development
of a reliable business environment.
Weak Intellectual Property Protection
Even when they exist, laws that safeguard intellectual
property rights may not be enforced, or the judicial
process may be painfully slow.
Bureaucracy, Red Tape, and Lack of
Transparency
Burdensome administrative rules and excessive
requirements for licenses, approvals, and paperwork all
delay business activities. Excessive bureaucracy is
usually associated with lack of transparency, suggesting
that legal and political systems may not be open and
accountable to the public. Bribery, kickbacks, and
extortion, especially in the public sector, cause difficulty
for managers. Where anti-corruption laws are weak,
managers may be tempted to offer bribes to ensure the
success of business deals.
Poor Physical Infrastructure
In advanced economies, high-quality roads, drainage
systems, sewers, and electrical utilities are taken for
granted. However, in emerging markets, such basic
infrastructure is often sorely lacking.
Partner Availability and Qualifications
Foreign firms should seek alliances with well-qualified
local companies in countries characterized by
inadequate legal and political frameworks. Through
such partners, foreign firms can access local market
knowledge, establish supplier and distributor networks,
and develop key government contacts. However,
partners that can provide these advantages are not
always readily available in emerging markets, especially
smaller ones.
Dominance of Family Conglomerates
Many emerging market economies are dominated by
family-owned rather than publicly owned businesses. A
family conglomerate (FC) is a large, highly diversified
company that is privately owned. FCs operate in
industries ranging from banking to construction to
manufacturing. They control the majority of economic
activity and employment in emerging markets.

A large, highly diversified company that is privately owned.
Strategies for Emerging Markets Corporate Social Responsibility in Emerging
Customize Offerings to Unique Emerging Markets and Developing Economies
Market Needs
Successful firms develop a deep understanding of the The most important trends here are fostering
distinctive characteristics of buyers, local suppliers, and economic development with profitable
distribution channels in emerging markets. They build modernization projects and facilitating
good relationships with the communities in which they entrepreneurship through small-scale loans. Such
operate, partly to better understand local conditions and efforts are a form of corporate social responsibility
partly to earn customer respect and loyalty. because they help developing economies grow.
The ability to customize offerings and devise innovative Foster Economic Development with
business models depends largely on the firm’s flexibility Profitable Projects
And entrepreneurial orientation. In emerging markets, Historically, few firms targeted poor countries because
many people are illiterate and fewer than one in four managers assumed there were few profitable
have regular access to the Internet and other computer- opportunities. In reality, if firms market appropriate
based systems. products and employ suitable strategies, they can earn
Consequently, MNEs employ creative approaches to substantial profits in emerging markets and developing
promote their offerings in local markets. Where economies.
suppliers and distribution channels are lacking, they
develop their own infrastructure to obtain requisite raw Microfinance to Facilitate
materials and components or move finished goods to Entrepreneurship
local buyers. Microfinance provides small-scale financial services, such
as “microcredit” and “microloans,” that assist
Partner with Family Conglomerates entrepreneurs to start businesses in poor countries. By
Family conglomerates are key players in their respective taking small loans, frequently less than $100, small-scale
economies and have much capital to invest in new entrepreneurs accumulate sufficient capital to launch
ventures. successful businesses.
Target Governments in Emerging
Markets
In emerging markets and developing economies,
government agencies and state-owned enterprises are an
important customer group for three reasons. First,
governments buy enormous quantities of products (such
as computers, furniture, office supplies, motor vehicles)
And services (such as architectural, legal, and
Consulting services). Second, state enterprises in áreas
like railways, airlines, banking, oil, chemicals, and Steel
buy goods and services from foreign companies. Third,
the public sector influences the procurement activities of
varios private or semi-private corporations.
Construction firms lobby the government to gain
Accessto promising deals to build apartments and
houses for local dwellers. Emerging market
governments regularly announce tenders—formal offers
made by a buyer to purchase certain products or
services. A tenderis also known as a request
for proposals (RFPs).
Formal offers made by a buyer to purchase certain products
or services.