CBPA Dean's Research Seminar Series

1. CBPA Dean's Research Seminar Series Presentation of Research Deepak Sethi February 23, 2007

2. 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

3. 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

4. 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

5. Toward a More Complete Perspective on Multinationality A Conceptual Review of the Costs and Benefits of Doing Business Abroad by Deepak Sethi William Q. Judge

6. 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

7. 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)

8. 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

9. 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

10. 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

11. 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)

12. 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

13. 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)

14. Conceptual Framework