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CBPA Dean's Research Seminar Series. Presentation of Research Deepak Sethi February 23, 2007. Overview of the Research. One among a trilogy of three conceptual papers Seek to extend the competitive advantage literature – generic as well as the global business contexts

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CBPA Dean's Research Seminar Series

Presentation of Research

Deepak Sethi

February 23, 2007

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Overview of the Research

One among a trilogy of three conceptual papers

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

  • Refine the dynamic capabilities notion by presenting a dynamic adaptation framework

    • Illustrate its application through case studies of two firms – Bombay Dyeing and Reliance

    • Submitted for presentation at the SMS 2007 conference

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Overview Continued

2. Refines the International Business literature which traditionally has treated countries as homogenous entities

  • Analysis at country, region or bloc level (e.g. emerging economies) masks important intra-country differences and local factors

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

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

  • Submitted to the Academy of International Business conference

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Overview Continued

  • Some traditional conceptualizations no longer reflect the scale and scope of contemporary global business operations

    • Over emphasis on the costs of doing abroad

    • Global business operations are now more multilateral and not merely bilateral

    • Present a conceptual framework that integrates the costs as well as the benefits of doing business abroad, in both contexts

    • Paper is under review at the International Business Review

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Toward a More Complete Perspective on Multinationality

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


Deepak Sethi

William Q. Judge

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Theoretical Development

Hymer’s (1960 / 1976) seminal work first provided the rationale for FDI – distinguishing it from foreign portfolio investment

Costs of doing business abroad (CDBA)

Zaheer (1995) introduced the notion of the liability of foreignness (LOF)

costs due to spatial distance (travel, transportation; coordination over distance/time zones)

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

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

home country environment costs

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  • LOF was deemed synonymous with CDBA

  • Several scholars developed this stream further

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

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

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

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Journal of International Management (2002) Special Issue on the Liability of Foreignness

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

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

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

  • Organizational learning - Petersen & Pedersen

  • Evolutionary dynamics - Hennart, Roehl & Zeng

  • Socioeconomic theory - Luo, Shenkar & Nyaw

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Glaring Differences in Scholarly Perceptions

  • Fragmented picture of the phenomenon

  • Confusion over the LOF – CDBA Relationship

  • Dyadic context of only the host vs home countries

  • Over-emphasis on CDBA

  • Benefits accruing to MNEs are not integrated

  • Highlighted need for a holistic conceptualization

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Phenomenal Changes in the Global Business Environment

  • Hostility towards MNEs and FDIduring the 50s and 60s

  • Economic imperialism (Sovereignty at Bay - Vernon 1971)

  • Polarization due to Cold War, sheen of socialist economy

  • Dramatic changes since the 80s - economic liberalization, collapse of Soviet Union, technological developments

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

  • FDI increased 279% between 1992 and 2002

  • Multi-country operations and global alliances – have implications on the costs as well as benefits to MNEs

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Reappraising Liability of Foreignness

  • LOF – additional costs of foreign firm relative to host countryrival

  • Purely dyadic context – home vs host country

  • Notion of host country and relative costs ? – examples

  • Discriminatory regulations, prejudice – formidable & debilitating

    substantially reduced due to economic liberalization

  • Incidental – cultural differences, lack of information and roots

    alsoreducing due to trend towards joint ventures, alliances

  • Costs outside the dyadic context - due to multilateral linkages

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

  • CDBA has two components

    • traditional LOF (dyadic context)

    • a new notion Liability of Multinationality(LOM)

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Liability of Multinationality (LOM)

  • Costs incurred outside the host country environment

    • Ford’s Chinese subsidiary ‘s LOF and LOM

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

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

  • Hedging against exchange rate volatility

  • Monitoring regional and global business environment

  • Monitoring multilateral institutions (WTO, IMF, EU)

  • Opportunity costs of missed multi-point pricing options

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Conceptual Framework

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

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

  • Benefitsnot integrated in a holistic conceptualization

  • Institutional economics literature analyzes only the benefits of economic development to host countries

  • Conceptual framework integrates costs as well as benefits – both in dyadic as well as multilateral contexts

  • The 2 x 2 matrix introduce two more notions

    • Assets of Foreignness (AOF)

    • Assets of Multinationality (AOM)