# International Strategy Concept Card: [Company, market or course case] > A concept card for the international and global strategy elective: why firms go abroad and why foreign firms start > at a disadvantage (Hymer 1976; Zaheer 1995), how distance shapes where to go (Ghemawat's CAGE framework, 2001, and > the Kogut and Singh index, 1988), how firms enter (export, licence, joint venture, wholly owned subsidiary, with > Dunning's OLI paradigm, 1980, and the Uppsala model, Johanson and Vahlne 1977 and 2009), and how they organise once > they are there (the integration-responsiveness grid of Prahalad and Doz 1987, the four strategies of Bartlett and > Ghoshal 1989, and Ghemawat's AAA triangle, 2007). It builds on core cards and links to them instead of re-teaching > them: `mba/mba-growth-strategy-card` (market development, build, borrow or buy), `mba/mba-fx-interest-parity-card` > (forward rates and exposure), `mba/mba-five-forces-card` and `mba/mba-value-chain-card` (industry and activities) > and `mba/mba-npv-irr-card`. It is for second-year MBA students and for managers who plan a market entry or run a > multi-country business. Source basis: the original works cited below, written in original words. Every company, > country and number is fictional (Corvane Robotics, Northfield Outdoor Co., Country A to D, local currency units > LCU) and was computed in Python; nothing here is a forecast, a tariff, a tax position or legal advice. Replace every > [bracketed] value and every row marked *Example*. ## Document control | Field | Value | |---|---| | Course, case or decision | [International strategy elective, session 5 / entry into Country A] | | Learner or team | [Your name or learning team] | | Company analysed | [Corvane Robotics (fictional) / your company] | | Markets considered | [Country A, Country B, Country C] | | Data sources and dates | [Market studies, trade statistics, central bank rates, YYYY-MM-DD] | | Currency and unit | [USD m; local currency units (LCU) where stated] | | Advisers consulted | [Customs, tax, legal, in-country partner; date] | | Reviewed by | [Instructor, mentor or strategy team] | | Last updated | YYYY-MM-DD | ## Contents - [When to use it](#when-to-use-it) - [The idea in plain language](#the-idea-in-plain-language) - [Frameworks in more depth](#frameworks-in-more-depth) - [Formulas and notation](#formulas-and-notation) - [Assumptions and limits](#assumptions-and-limits) - [How managers use it in practice](#how-managers-use-it-in-practice) - [Worked example A (fully solved): Corvane Robotics first international market](#worked-example-a-fully-solved-corvane-robotics-first-international-market) - [Worked example B (half solved): Northfield adapt or standardise in Europe](#worked-example-b-half-solved-northfield-adapt-or-standardise-in-europe) - [Exercise C (unsolved): Corvane assembly location](#exercise-c-unsolved-corvane-assembly-location) - [Connections to other cards](#connections-to-other-cards) - [Common mistakes and misconceptions](#common-mistakes-and-misconceptions) - [Self-test questions](#self-test-questions) - [My notes and next steps](#my-notes-and-next-steps) - [Sources and further reading](#sources-and-further-reading) - [Answer key](#answer-key) - [Revision history](#revision-history) - [Standard and licence note](#standard-and-licence-note) ## When to use it **One-sentence rule:** use this card when a firm must decide whether to go abroad, which countries to enter, how to enter them and how to balance global scale against local fit once it operates in several countries. | Use it when | Use something else when | |---|---| | A firm chooses its first or next foreign market | You need only the market size (`mba/mba-market-sizing-drills`) | | A case compares export, licensing, a joint venture and a subsidiary | You need a full acquisition valuation (`mba/mba-dcf-valuation-card`, `mba/mba-synergy-valuation-card`) | | A multinational debates standardising or adapting products and processes | You need the hedge for a specific currency exposure (`mba/mba-fx-interest-parity-card`) | | Management chooses where to place plants, service hubs or R&D | You need the full network optimisation (`mba/mba-network-design-card`) | | A board asks how the head office should relate to country units | You need the whole portfolio of businesses (`mba/mba-corporate-strategy-card`) | ## The idea in plain language **Why go abroad, and why it is hard.** A firm goes abroad to sell more of what it already does well, to reach cheaper or better inputs, or to learn. But a foreign firm starts behind local rivals. Hymer (1976, from his 1960 dissertation) argued that a firm can operate abroad only if it owns an advantage large enough to offset the costs of being foreign. Zaheer (1995) named these costs the **liability of foreignness**: unfamiliarity with the local environment, discrimination by customers or governments, and the cost of coordinating across distance. Her study of foreign exchange trading rooms in New York and Tokyo supported a liability of foreignness and found that capabilities imported from the parent's home base helped foreign units compete, while copying the practices of successful local firms proved difficult. The first question in any international case is therefore: **which of our advantages travels, and is it larger than the liability of foreignness?** **Where to go: distance matters.** Ghemawat (2001) argued that firms overrate the size of foreign markets and underrate the cost of distance. His **CAGE** framework splits distance into four kinds: | Dimension | Examples of distance | Industries most sensitive (examples) | |---|---|---| | Cultural | Language, ethnicity, religion, social norms, trust | Products with high linguistic or identity content, food, media | | Administrative | Absence of shared colonial ties, trade blocs, currency; weak institutions; political hostility | Regulated industries, government buyers, strategic sectors | | Geographic | Physical distance, time zones, no common border, weak transport links | Heavy or perishable products, services needing local presence | | Economic | Differences in income, labour cost, skills, infrastructure | Products whose demand depends on income; arbitrage on cost | Distance is **bilateral**: Country B is far from Corvane's home market but may be close to a rival's. And economic distance cuts both ways: it reduces demand for products designed for richer markets, but creates arbitrage opportunities in sourcing and production. Gravity models of trade, introduced by Tinbergen (1962), formalise the core intuition: trade between two countries rises with their economic size and falls with the distance between them. **How to enter: the mode ladder.** Entry modes differ in commitment, control and risk: | Mode | Commitment and cost | Control of know-how and customers | Speed | Typical risk | |---|---|---|---|---| | Export via distributor or agent | Low | Low | Fast | Distributor captures margin and customer relationship | | Licensing or franchising | Low | Low to medium | Fast | Know-how leaks; licensee becomes a rival | | Joint venture | Medium | Shared | Medium | Partner conflict; unequal learning | | Acquisition | High | High | Fast | Overpaying; integration across cultures | | Greenfield wholly owned subsidiary | High | High | Slow | Liability of foreignness; long payback | Dunning's (1980) **eclectic (OLI) paradigm** explains when a firm owns production abroad instead of exporting or licensing: it needs an **ownership** advantage (technology, brand, skills), a **location** advantage for producing in that country (market access, inputs, cost) and an **internalisation** advantage (it is better to exploit the ownership advantage inside the firm than to sell or license it, because contracts for know-how are hard to write and enforce). Missing L: export. Missing I: license. All three: invest. **Step by step: the Uppsala model.** Johanson and Vahlne (1977) observed that firms tend to internationalise gradually: first to markets that are close in "psychic distance", and with low-commitment modes, increasing commitment as they learn. In their revision (2009) they put networks at the centre: the main obstacle is being an outsider to the relevant business network (the **liability of outsidership**), and commitment grows with trust and knowledge built in relationships. Oviatt and McDougall (1994) described **international new ventures** that are international from founding, which a gradual model explains poorly; digital products and global supply networks have made such firms more common. **How to organise: global scale or local fit.** Levitt (1983) argued that technology was making markets converge, so firms should sell standardised products globally at low cost. Critics and later research showed that convergence is partial and uneven. Prahalad and Doz (1987) framed the trade-off as two pressures: **global integration** (scale, global customers, shared technology) and **local responsiveness** (different tastes, rules, channels, host-government demands). Bartlett and Ghoshal (1989) described four ways firms answer them, discussed below. ## Frameworks in more depth **The integration-responsiveness grid and four strategies.** Bartlett and Ghoshal (1989) described four organisational models. In this card the commonly used labels are: | Strategy | Integration pressure | Responsiveness pressure | How it works | Main weakness | |---|---|---|---|---| | Multidomestic (multinational) | Low | High | Country units act as a federation of near-independent businesses, each adapted to its market | Duplicated cost; slow to share innovations | | Global | High | Low | Centre designs and makes standard products for world markets; units deliver | Misses local needs | | International | Low to medium | Low to medium | Centre transfers knowledge and products, units adapt them | Neither cheapest nor most responsive | | Transnational | High | High | Integrated network: specialised units, flows of products and knowledge in all directions, shared vision | Hard to manage; needs strong culture and coordination | The transnational is an aspiration more than a common reality: it asks managers to hold global efficiency, local responsiveness and worldwide learning at the same time. **The AAA triangle.** Ghemawat (2007) proposed three generic responses to differences between countries: **adaptation** (change products, policies and organisation to fit local differences, for local revenue and share), **aggregation** (group countries into regions or segments to gain scale beyond the country level) and **arbitrage** (exploit differences, such as lower labour cost or special skills, rather than adjust to them). He argued that a firm should usually emphasise one or two, because each pulls the organisation in a different direction: adaptation favours country managers, aggregation favours regional or product heads, arbitrage favours a global supply chain. **The national environment.** Porter (1990) asked why some nations host internationally successful industries and proposed the **diamond**: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry, with chance and government as influences. For a firm, the diamond suggests where to place activities to learn from demanding customers and strong clusters, not only where costs are lowest. **The product cycle.** Vernon (1966) described how production of a new product starts near innovating, high-income markets, then moves to other advanced countries and later to lower-cost locations as the product standardises. It explains some patterns well and others badly (global launches, international new ventures), but it is a useful reminder that the best location for an activity changes over the product's life. **Cultural distance as a number.** Kogut and Singh (1988) built an index of cultural distance from the differences in national culture scores between two countries, corrected for the variance of each dimension, and found that greater cultural distance made entry by acquisition less likely relative to joint ventures and greenfield entry. Later work has criticised the index (it assumes symmetry, treats national averages as fixed and ignores variation inside countries), so use it as one indicator next to CAGE, not as a verdict. **Rules that change (questions, not advice).** Cross-border moves raise questions that only current official sources and qualified advisers can answer: tariff rates and rules of origin, sanctions and export controls, foreign investment screening, data localisation, transfer pricing and global minimum tax rules for large groups, and employment law for posted staff. Record each question, the source, the adviser and the date in your Document control. For the finance side, see `finance/transfer-pricing-master-file` and `finance/pillar-two-globe-readiness`. ## Formulas and notation **Composite CAGE distance** (scores 1 = close to 5 = far, weights chosen for the industry): $$ D_j = \sum_{d \in \{C, A, G, E\}} w_d \, s_{dj}, \qquad \sum_d w_d = 1 $$ **Distance-adjusted market** (a gravity-style screening heuristic): $$ M_j^{\text{adj}} = \frac{M_j (1 + g_j)^{h}}{D_j^{\,\theta}} $$ **Kogut and Singh (1988) cultural distance** between country $j$ and the home country $h$ over $n$ dimensions: $$ KS_j = \frac{1}{n} \sum_{i=1}^{n} \frac{(I_{ij} - I_{ih})^2}{V_i} $$ **Foreign cash flows in home currency** with forward rates from covered interest parity (annual compounding; quote convention as in `mba/mba-fx-interest-parity-card`, home currency per unit of foreign currency): $$ F_t = S_0 \left(\frac{1 + i_d}{1 + i_f}\right)^{t}, \qquad CF_t^{\text{USD}} = CF_t^{\text{LCU}} \times F_t $$ **Entry mode value** with a growing perpetuity after year $T$: $$ NPV = \sum_{t=0}^{T} \frac{CF_t^{\text{USD}}}{(1 + r)^t} + \frac{1}{(1+r)^T} \cdot \frac{CF_T^{\text{USD}} (1 + g)}{r - g} $$ **Landed cost** of a unit delivered to the customer country: $$ LC = (K + h\,w + f)(1 + \tau) + o $$ | Symbol | Meaning | Unit | |---|---|---| | $D_j$ | Composite distance of country $j$ from the home market | score 1 to 5 | | $w_d$, $s_{dj}$ | Weight of distance dimension $d$; score of country $j$ on $d$ | weight; 1 to 5 | | $M_j$, $g_j$, $h$ | Addressable market today, annual growth, years ahead | USD m, %, years | | $\theta$ | Distance elasticity of the screen (1 = moderate, 2 = strong penalty) | number | | $I_{ij}$, $I_{ih}$ | Score of country $j$ and of the home country on cultural dimension $i$ | index | | $V_i$ | Variance of dimension $i$ across the sample of countries | index squared | | $S_0$, $F_t$ | Spot rate today and forward rate for year $t$ (USD per LCU) | USD per LCU | | $i_d$, $i_f$ | Home (USD) and foreign (LCU) interest rates | % per year | | $r$, $g$ | Discount rate in USD and long-run growth after year $T$ | % per year | | $K$, $h$, $w$, $f$ | Components cost, labour hours, wage per hour, freight per unit | USD k, hours, USD k per hour, USD k | | $\tau$, $o$ | Tariff rate on the customs value; extra overhead per unit | %, USD k | ## Assumptions and limits - **Distance scores and weights are judgements.** Choose weights for the industry before scoring countries, and test whether the ranking survives other plausible weights. - **The gravity-style screen is a filter, not a forecast.** It ranks markets for further study; it does not say what share the firm will win. - **Cultural indices average over people and change over time.** National scores hide regional and generational variation, and the dimension scores come from surveys with their own limits. - **Forward rates are not forecasts.** Covered interest parity converts cash flows at a rate that can be locked in today for short horizons; for long horizons it is a consistent planning convention. Use scenarios for real exchange rate shocks (`mba/mba-fx-interest-parity-card`). - **Country risk belongs in cash flows first.** Model expropriation, conflict or capital-control scenarios in the cash flows where possible, rather than adding an arbitrary premium to the discount rate; if you add a premium, say why and test it. - **Terminal values dominate.** In entry decisions most of the value of high-commitment modes sits after the planning horizon (Worked example A); state the assumption and test it. - **Modes are not permanent.** Many firms move up the ladder (distributor, then joint venture, then subsidiary). Value the option to switch, and the cost of exiting a partner. - **Rules change.** Tariffs, sanctions, tax and investment screening can change faster than an entry plan pays back. Date every fact and confirm it with advisers. ## How managers use it in practice 1. **Test the advantage**: which ownership advantage travels, and is it larger than the liability of foreignness? 2. **Screen markets** on size, growth and CAGE distance; shortlist two or three for deeper study. 3. **Study the shortlist**: industry structure in each country (`mba/mba-five-forces-card`), customers, rivals, partners, rules and advisers' answers. 4. **Choose the entry mode** with OLI logic and an NPV of each mode in home currency, including a terminal value sensitivity and the option to move up the ladder. 5. **Decide the organisation**: position on the integration-responsiveness grid and the AAA emphasis; decide which decisions sit at the centre and which in the country. 6. **Plan the activities and locations**: which value-chain activities go where (`mba/mba-value-chain-card`). 7. **Review** each year: market share, profitability in home and local currency, and whether the mode should change. ```mermaid flowchart TD A["Which advantage travels? Larger than liability of foreignness?"] -- No --> Z["Stay home or build the advantage first"] A -- Yes --> B["Screen markets: size, growth, CAGE distance"] B --> C["Shortlist and study industry, customers, rules"] C --> D{"Location advantage for producing in the country?"} D -- No --> E["Export via distributor or own sales office"] D -- Yes --> F{"Better to keep know-how inside the firm?"} F -- No --> G["License or franchise"] F -- Yes --> H{"Need a partner's local assets or network?"} H -- Yes --> I["Joint venture or alliance"] H -- No --> J["Wholly owned: greenfield or acquisition"] E --> K["Choose organisation: I-R grid and AAA emphasis"] G --> K I --> K J --> K K --> L["Annual review: performance, risk, move up or exit"] L --> C ``` ## Worked example A (fully solved): Corvane Robotics first international market **Situation (fictional).** Corvane Robotics, a warehouse-robotics company reporting in USD, has a strong home business and plans its first international market as a market development move (the market development cell of the Ansoff matrix in `mba/mba-growth-strategy-card`). Its ownership advantages are navigation software, gripper patents and fleet data. Three countries are shortlisted. All data are fictional. **Step 1: CAGE distance.** For warehouse robots the team weights administrative distance most (safety certification, standards, public incentives), then geographic distance (field service response times) and economic distance (labour cost drives demand for automation), and cultural distance least (business-to-business sale, English-language software is acceptable with a local interface). | Country | Cultural (w 0.15) | Administrative (w 0.35) | Geographic (w 0.25) | Economic (w 0.25) | Composite $D_j$ | Excel | |---|---|---|---|---|---|---| | Country A *(Example)* | 2 | 2 | 3 | 1 | 2.00 | `=SUMPRODUCT($B$1:$E$1,B2:E2)` | | Country B *(Example)* | 4 | 4 | 4 | 2 | 3.50 | `=SUMPRODUCT($B$1:$E$1,B3:E3)` | | Country C *(Example)* | 1 | 1 | 1 | 1 | 1.00 | `=SUMPRODUCT($B$1:$E$1,B4:E4)` | **Step 2: distance-adjusted market.** Addressable market in 2026 and growth: Country A USD 900m at 12% a year, Country B USD 1,600m at 18%, Country C USD 400m at 8%. Market three years ahead, then the screen at $\theta = 1$ and $\theta = 2$: | Country | Market 2029 (USD m) | Adjusted, $\theta = 1$ | Adjusted, $\theta = 2$ | Excel ($\theta = 2$) | |---|---|---|---|---| | Country A | 1,264.4 | 632.2 | 316.1 | `=900*(1+12%)^3/2^2` | | Country B | 2,628.9 | 751.1 | 214.6 | `=1600*(1+18%)^3/3.5^2` | | Country C | 503.9 | 503.9 | 503.9 | `=400*(1+8%)^3/1^2` | The ranking depends on how strongly distance bites. With a moderate penalty, the large, fast-growing Country B leads; with a strong penalty, the small neighbour Country C leads. Country A is second in both: large enough to matter and close enough to serve. For a first market, where the liability of foreignness is highest and learning is the main goal, the Uppsala logic favours A or C; C is too small to justify a dedicated organisation, so the team shortlists Country A, keeping Country B as the next step once the firm has international experience. **Step 3: cultural distance check.** Fictional national culture scores on four dimensions (home: 40, 90, 60, 45) and the variance of each dimension across a sample of countries (420, 520, 300, 610): | Country | Scores | Terms $(I_{ij}-I_{ih})^2/V_i$ | $KS_j$ | |---|---|---|---| | Country A | 35, 70, 65, 65 | 0.060, 0.769, 0.083, 0.656 | 0.392 | | Country B | 80, 25, 55, 40 | 3.810, 8.125, 0.083, 0.041 | 3.015 | | Country C | 40, 80, 60, 45 | 0.000, 0.192, 0.000, 0.000 | 0.048 | Excel for Country A: `=SUMPRODUCT((B2:E2-$B$1:$E$1)^2/$B$5:$E$5)/4`. The index confirms the CAGE picture: Country B is far more distant culturally (3.015 against 0.392), which Kogut and Singh's (1988) finding links to a preference for a joint venture or greenfield entry over an acquisition there. **Step 4: entry mode NPV for Country A.** Spot rate $S_0$ = 0.80 USD per LCU, USD rate 4%, LCU rate 6%, so the LCU trades at a forward discount. USD discount rate 12%, long-run growth after year 5 of 3%. Cash flows in LCU m: - **Export via a local distributor:** market sales 6, 9, 12, 15, 18; the distributor keeps 30% and Corvane earns a 35% margin on its own revenue; support cost 0.3 a year; certification 0.5 at year 0. Cash flow $= 0.70 \times 0.35 \times \text{sales} - 0.3$. - **50/50 joint venture with a local integrator:** sales 8, 13, 18, 23, 28 (the partner's customer network); Corvane receives half of a cash margin of 18% of sales plus a 10% margin on robots sold to the joint venture, which cost 55% of sales; contribution 2.0 at year 0. Cash flow $= 0.5 \times 0.18 \times \text{sales} + 0.55 \times 0.10 \times \text{sales}$. - **Wholly owned subsidiary:** sales 7, 13, 21, 30, 40 (slower start, then the whole value chain and direct customer relationships); cash margin 24% of sales less local fixed cost 2.0 a year; set-up 6.0 at year 0. | Year | 0 | 1 | 2 | 3 | 4 | 5 | |---|---|---|---|---|---|---| | Forward rate $F_t$ (USD per LCU) | 0.8000 | 0.7849 | 0.7701 | 0.7556 | 0.7413 | 0.7273 | | Export, LCU m | -0.50 | 1.170 | 1.905 | 2.640 | 3.375 | 4.110 | | Export, USD m | -0.400 | 0.918 | 1.467 | 1.995 | 2.502 | 2.989 | | Joint venture, LCU m | -2.00 | 1.160 | 1.885 | 2.610 | 3.335 | 4.060 | | Joint venture, USD m | -1.600 | 0.910 | 1.452 | 1.972 | 2.472 | 2.953 | | Subsidiary, LCU m | -6.00 | -0.320 | 1.120 | 3.040 | 5.200 | 7.600 | | Subsidiary, USD m | -4.800 | -0.251 | 0.863 | 2.297 | 3.855 | 5.528 | Excel: forward rate `=0.8*((1+4%)/(1+6%))^B1`, USD cash flow `=B3*B$2`. | Mode | NPV years 0 to 5 (USD m) | Terminal value at year 5 | PV of terminal value | NPV including terminal value | |---|---|---|---|---| | Export | 6.30 | 34.21 | 19.41 | 25.71 | | Joint venture | 5.02 | 33.79 | 19.18 | 24.20 | | Subsidiary | 2.88 | 63.26 | 35.90 | 38.78 | Excel: `=NPV(12%, C4:G4)+B4` for the five-year NPV; terminal value `=G4*(1+3%)/(12%-3%)`; PV `=TV/(1+12%)^5`. ```vega-lite { "$schema": "https://vega.github.io/schema/vega-lite/v5.json", "description": "Corvane Robotics (fictional): NPV of three entry modes for Country A, USD m", "width": 360, "height": 220, "data": {"values": [ {"mode": "Export", "part": "NPV years 0 to 5", "value": 6.30}, {"mode": "Export", "part": "PV of terminal value", "value": 19.41}, {"mode": "Joint venture", "part": "NPV years 0 to 5", "value": 5.02}, {"mode": "Joint venture", "part": "PV of terminal value", "value": 19.18}, {"mode": "Subsidiary", "part": "NPV years 0 to 5", "value": 2.88}, {"mode": "Subsidiary", "part": "PV of terminal value", "value": 35.90} ]}, "mark": "bar", "encoding": { "x": {"field": "mode", "type": "nominal", "title": null, "sort": ["Export", "Joint venture", "Subsidiary"]}, "y": {"field": "value", "type": "quantitative", "title": "USD m", "stack": "zero"}, "color": {"field": "part", "type": "nominal", "title": null} } } ``` **Reading the result.** Over five years, export wins: it needs little capital and earns early. Including value after year 5, the subsidiary is worth USD 13m more than export (38.78 against 25.71), because Corvane captures the whole margin and owns the customer relationships and fleet data, its main source of advantage. That is OLI logic in numbers: the internalisation advantage (fleet data and software know-how that a distributor or partner could capture) and a growing location advantage (service presence) favour ownership once the market is proven. The joint venture is never the best of the three here; it would be worth more only if the partner brought customers a subsidiary could not win, or if rules required local ownership. **Step 5: organisation.** Integration pressure is high (common software platform, shared R&D, global key accounts); responsiveness pressure is moderate (local safety certification, language of the interface, field service). Corvane sits near the global corner of the grid, with aggregation as its main AAA lever (one product platform for all countries) and adaptation limited to certification, interface and service. **Step 6: recommendation.** (1) Enter Country A through a distributor now, with a contract that keeps fleet data and software accounts with Corvane and gives Corvane the right to take over key accounts. (2) Set a trigger to open a wholly owned subsidiary: for example, 150 robots installed or two consecutive years of market sales above LCU 12m, whichever comes first. (3) Keep Country B for a later stage and revisit it with a partner. (4) Ask customs, tax and legal advisers in Country A the questions listed in "Rules that change" before signing the distributor contract. ## Worked example B (half solved): Northfield adapt or standardise in Europe **Situation (fictional).** Northfield Outdoor Co. sells EUR 20m a year of the standard global range in Europe at a 45% gross margin: EUR 12m through its European e-commerce site (the euro exposure analysed in `mba/mba-fx-interest-parity-card`) and EUR 8m through European wholesale partners. Its European manager proposes an adapted range: European sizing, colours chosen by local buyers and a small sub-range made in Europe. She expects a 15% sales uplift; shorter production runs cut the gross margin to 43%, and adaptation adds EUR 0.6m a year of fixed cost (local design and buying staff). | Item | Value | Excel | |---|---|---| | Standard range: gross profit | 9.00 | `=20*45%` | | Adapted range: sales | [ ] | `=20*(1+15%)` | | Adapted range: gross profit less adaptation cost | [ ] | `=B3*43%-0.6` | | Gain from adapting | [ ] | `=B4-B2` | | Break-even sales uplift | [ ] | `=(B2+0.6)/43%/20-1` | | Adapted contribution if the uplift is only 10% | 8.86 | `=20*1.1*43%-0.6` | 1. Is adaptation worth it at the expected 15% uplift? By how much? [ ] 2. What uplift is needed to break even? [ ] 3. Which CAGE dimensions justify adaptation here (sizing, colour preferences, made-in-Europe sourcing)? [ ] 4. Where does this decision sit in Ghemawat's AAA triangle, and what does it cost the global range in aggregation? [ ] 5. Recommend a decision and a test that would reduce the uncertainty about the uplift. [ ] ## Exercise C (unsolved): Corvane assembly location Once Country A volumes grow, Corvane must decide where to assemble robots for Country A customers. All amounts in USD k per robot, fictional: | Option | Components $K$ | Labour hours $h$ | Wage $w$ (USD k per hour) | Freight $f$ | Tariff $\tau$ into Country A | Extra overhead $o$ | |---|---|---|---|---|---|---| | Home plant *(Example)* | 52.0 | 120 | 0.055 | 4.0 | 5% | 0.0 | | Country D plant (low-cost third country) *(Example)* | 50.0 | 150 | 0.018 | 5.5 | 5% | 3.0 | | Country A plant (in the market) *(Example)* | 53.0 | 125 | 0.048 | 1.0 | 0% | 4.5 | 1. Compute labour cost, customs value, duty and landed cost per robot for each option. Give the Excel formula. 2. Which option is cheapest, and by how much compared with the home plant? 3. If the tariff on Country D-origin robots rises to 15%, what is Country D's landed cost? Does the ranking change? 4. Home-plant costs are in USD. If the LCU falls from 0.80 to 0.72 USD, what happens to the home-plant robot's cost in LCU, and to Corvane's local price competitiveness? Which option is a natural hedge? 5. Which AAA strategy does each option represent? Which value-chain and resilience arguments (lead time, service, single-site risk, know-how protection) would you add (`mba/mba-supply-chain-resilience-card`)? ## Connections to other cards - `mba/mba-growth-strategy-card`: international expansion as market development; build, borrow or buy is the entry mode choice seen from the growth plan. - `mba/mba-resource-based-view-card`: the ownership advantage in OLI is a VRIO resource that must travel. - `mba/mba-five-forces-card`: industry structure differs by country; do the analysis per country. - `mba/mba-value-chain-card` and `mba/mba-network-design-card`: where to place each activity. - `mba/mba-fx-interest-parity-card`: forward rates, transaction and economic exposure created by the entry. - `mba/mba-npv-irr-card` and `mba/mba-capm-wacc-card`: the valuation of each mode and the discount rate. - `mba/mba-corporate-strategy-card` and `mba/mba-corporate-governance-card`: how the centre adds value to country units and how joint ventures are governed. - `mba/mba-supply-chain-resilience-card`: location choices and single-country risk. - `mba/mba-global-immersion-plan`: use an immersion trip to test a CAGE analysis on the ground. ## Common mistakes and misconceptions 1. **Market size without distance.** Large markets far away often lose to smaller ones nearby once distance costs are counted. 2. **Assuming the home advantage travels.** A brand, channel or relationship that wins at home may mean nothing abroad. 3. **Treating distance as one number.** Cultural, administrative, geographic and economic distance hit different industries differently; weight them for your industry. 4. **Ignoring that economic distance can be an opportunity.** Differences in labour cost and skills are the basis of arbitrage. 5. **Comparing modes on a five-year NPV only.** High-commitment modes create most of their value later; show the terminal value separately and test it. 6. **Converting foreign cash flows at today's spot rate for all years.** Use forward rates or a consistent parity assumption and scenarios. 7. **Choosing a joint venture without an exit plan.** Write the governance, deadlock and exit terms before you sign. 8. **Calling every firm "transnational".** Place the firm on the grid with evidence: number of product variants, where decisions are made, flows of knowledge. 9. **Pursuing adaptation, aggregation and arbitrage at once.** Each needs a different organisation; emphasise one or two. 10. **Treating tariffs, tax and sanctions as fixed.** They change; date every fact and confirm it with advisers. 11. **Using a cultural distance index as a verdict.** It averages over people and dimensions; combine it with fieldwork. ## Self-test questions 1. What is the liability of foreignness (Zaheer 1995), and what does Hymer's argument imply for a firm going abroad? 2. Name the four CAGE dimensions with one example each and an industry sensitive to each. 3. State Dunning's (1980) OLI conditions and which entry mode follows when L or I is missing. 4. How did Johanson and Vahlne (2009) revise the Uppsala model? 5. Place the four strategies of Bartlett and Ghoshal (1989) on the integration-responsiveness grid. 6. What are the three strategies in Ghemawat's AAA triangle, and why emphasise one or two? 7. A country has scores Cultural 3, Administrative 2, Geographic 4, Economic 2 with weights 0.15, 0.35, 0.25, 0.25. What is its composite distance? Give the Excel formula. 8. Spot is 0.80 USD per LCU, the USD rate 4% and the LCU rate 6%. What is the two-year forward rate? 9. Why does the wholly owned subsidiary rank last over five years but first including terminal value in Worked example A? 10. Two differences between a born global (international new venture) and a firm following the Uppsala path. 11. Name the four corners of Porter's (1990) diamond. 12. Give one reason the Kogut and Singh index can mislead. ## My notes and next steps | Date | Note or action | Done | |---|---|---| | YYYY-MM-DD | *Example:* Score two countries my employer is considering on CAGE with a colleague from each country | [ ] | | YYYY-MM-DD | *Example:* Rerun Worked example A with terminal growth of 1% and see whether the ranking changes | [ ] | | YYYY-MM-DD | [Your action] | [ ] | ## Sources and further reading - Bartlett, C. A., and Ghoshal, S. (1989). *Managing Across Borders: The Transnational Solution*. Harvard Business School Press. - Dunning, J. H. (1980). Toward an eclectic theory of international production: Some empirical tests. *Journal of International Business Studies*, 11(1), 9-31. - Ghemawat, P. (2001). Distance still matters: The hard reality of global expansion. *Harvard Business Review*, 79(8). - Ghemawat, P. (2007). *Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter*. Harvard Business School Press. - Hymer, S. H. (1976). *The International Operations of National Firms: A Study of Direct Foreign Investment*. MIT Press (from the 1960 doctoral dissertation). - Johanson, J., and Vahlne, J.-E. (1977). The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. *Journal of International Business Studies*, 8(1), 23-32. - Johanson, J., and Vahlne, J.-E. (2009). The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. *Journal of International Business Studies*, 40(9), 1411-1431. - Kogut, B., and Singh, H. (1988). The effect of national culture on the choice of entry mode. *Journal of International Business Studies*, 19(3), 411-432. - Levitt, T. (1983). The globalization of markets. *Harvard Business Review*, 61(3). - Oviatt, B. M., and McDougall, P. P. (1994). Toward a theory of international new ventures. *Journal of International Business Studies*, 25(1), 45-64. - Porter, M. E. (1990). *The Competitive Advantage of Nations*. Free Press. - Prahalad, C. K., and Doz, Y. L. (1987). *The Multinational Mission: Balancing Local Demands and Global Vision*. Free Press. - Tinbergen, J. (1962). *Shaping the World Economy: Suggestions for an International Economic Policy*. Twentieth Century Fund. - Vernon, R. (1966). International investment and international trade in the product cycle. *Quarterly Journal of Economics*, 80(2), 190-207. - Zaheer, S. (1995). Overcoming the liability of foreignness. *Academy of Management Journal*, 38(2), 341-363. - Textbooks (further reading, by name only): Hill and Hult, *International Business: Competing in the Global Marketplace*; Peng, *Global Strategy*; Verbeke, *International Business Strategy*. - Open resource: OpenStax, *Principles of Management* (CC BY-NC-SA 4.0), chapter on managing in a global environment, https://openstax.org/details/books/principles-management. ## Answer key **Worked example B.** Adapted sales = 20 x 1.15 = EUR 23.0m. Adapted gross profit less adaptation cost = 23.0 x 0.43 - 0.6 = EUR 9.29m. Gain = 9.29 - 9.00 = EUR 0.29m a year. Break-even uplift = (9.0 + 0.6) / 0.43 / 20 - 1 = 11.63%. (1) Yes, by EUR 0.29m a year, a thin margin: at a 10% uplift adaptation loses EUR 0.14m (8.86 against 9.00). (2) 11.63%. (3) Mainly cultural distance (taste in colours and styles) and administrative or economic factors in sizing standards and consumer preference for local sourcing; geographic distance matters for the made-in-Europe sub-range (lead time, freight). (4) Adaptation; it reduces aggregation because the European range no longer shares all styles and production runs with the global range, which is why the margin falls. (5) Example: adapt sizing (low cost, clear evidence of fit problems from returns data) now, and test colours and the European sub-range in a limited set of stores or online for one season against matched controls before committing the fixed cost. **Exercise C.** (1) Labour = $h \times w$; customs value = $K + h w + f$; duty = $\tau \times$ customs value; landed cost = customs value + duty + $o$. Excel: `=(B2+C2*D2+E2)*(1+F2)+G2`. Home plant: labour 6.60, customs value 62.60, duty 3.13, landed 65.73. Country D: labour 2.70, customs value 58.20, duty 2.91, landed 64.11. Country A: labour 6.00, customs value 60.00, duty 0.00, landed 64.50. (2) Country D, USD 1.62k cheaper than the home plant (2.5%) and USD 0.39k cheaper than Country A. (3) 58.20 x 1.15 + 3.0 = 69.93: Country D becomes the most expensive and Country A the cheapest. (4) At 0.80 the home-plant robot costs LCU 82.16k; at 0.72 it costs LCU 91.29k, 11.1% more, so Corvane must raise local prices or accept a lower margin. Assembly in Country A is a partial natural hedge: local labour, freight and overhead are in LCU (components may still be priced in USD). (5) Country D is arbitrage; Country A is adaptation (and local presence, faster service and lead times, a "local" supplier for public buyers); the home plant is aggregation (scale in one site). Arguments to add: lead time and service, single-site risk, protection of assembly know-how, tariff exposure and the cost gap of only about 2.5%, which is smaller than plausible tariff or currency shocks. **Self-test.** 1. The extra costs a foreign firm bears compared with local firms (unfamiliarity, discrimination, coordination across distance). Hymer: a firm can operate abroad only if it owns an advantage large enough to offset them. 2. Cultural (language: media), administrative (no trade agreement: regulated or government-bought products), geographic (physical distance: heavy or perishable goods), economic (income differences: products whose demand depends on income, or labour-intensive production for arbitrage). 3. Ownership, location and internalisation advantages. Without L: export. Without I: license. With all three: foreign direct investment. 4. The business environment is seen as a network of relationships; the main obstacle is being an outsider to the relevant network (liability of outsidership), and learning, trust and commitment develop inside relationships. 5. Multidomestic: low integration, high responsiveness. Global: high integration, low responsiveness. International: low to medium on both. Transnational: high on both. 6. Adaptation, aggregation, arbitrage. Each needs a different organisation and set of trade-offs, so doing all three at once stretches the firm. 7. $0.15 \times 3 + 0.35 \times 2 + 0.25 \times 4 + 0.25 \times 2 = 2.65$; `=SUMPRODUCT(weights, scores)`. 8. $0.80 \times (1.04/1.06)^2 = 0.7701$ USD per LCU; `=0.8*((1+4%)/(1+6%))^2`. 9. It invests most up front and ramps slowly, so early cash flows are low; but it keeps the whole margin and grows fastest, so its year-5 cash flow and terminal value are the largest. 10. A born global sells in several countries from or near founding, often to distant markets at once, and relies on networks and digital channels; an Uppsala firm starts close to home and raises commitment step by step. 11. Factor conditions; demand conditions; related and supporting industries; firm strategy, structure and rivalry (with chance and government as further influences). 12. Examples: it treats national averages as fixed and uniform, assumes distance is symmetric, weights all dimensions equally, and relies on survey scores that may be dated. ## Revision history | Version | Date | Author | Change summary | |---|---|---|---| | 0.1 | YYYY-MM-DD | [Your name] | First draft from the template | | 0.2 | YYYY-MM-DD | [Your name] | *Example:* Administrative weight raised to 0.45 after advice on certification; Country A still ranks first | ## Standard and licence note Based on the published international business and strategy literature (Vernon 1966; Hymer 1976; Johanson and Vahlne 1977 and 2009; Dunning 1980; Levitt 1983; Prahalad and Doz 1987; Kogut and Singh 1988; Bartlett and Ghoshal 1989; Porter 1990; Oviatt and McDougall 1994; Zaheer 1995; Ghemawat 2001 and 2007). The frameworks are described in own words; the text, countries, examples and numbers are original and fictional, and nothing here is a statement of any country's current tariffs, tax or law. The card has no affiliation with any school, publisher, consulting firm or author named. Check the original works and current official sources before you rely on them. Template licence: MIT.