1. International Business Expansion Theories
M. Shahadat Hossain

2. International Trade
Trade across borders since 2000 BC (Moore and Lewis, 1999)
Why it occurs not explained till 15th Century (Wild et al. 2003)
Mercantilism
Classical Trade Theory
Factor Porportions Theory (1933)
In the ‘60s Theories fail to explain International Trade

3. Need for new theories
Post WW II – International Business research focus on firms
Reasons:
- Growing importance of MNEs
Unable to explain and predict intra-industry trade
Leontif paradox

4. Firm Based Theories of International Business Expansion
Theory
Author(s)/ Proponet(s)
Foreign Direct Investment
International Product Life Cycle
Transaction Cost Theory
Learning Theory
Theory of Internalization
Competitive Advantage
Eclectic Theory
S. Hymer (1960/1976)
Vernon (1966)
Williamson (1975)
Johansson and Vahlne (1977)
Rugman (1979)
Porter (1980)
Dunning (1980)

5. Yahoo Mongolia – GDP 6.13 Billion Yahoo – Revenue 6.32 Billion
If Yahoo was a country it would be ranked 138 amongst the nations of the world comparable to Mongolia
Data from Source: Fortune/CNN Money, IMF

6. FOREIGN DIRECT INVESTMENT
Foreign subsidiaries must possess firm-specific advantages that outweigh the disadvantages of being a foreign firm.
Monopolistic advantages such as knowledge advantages, distribution networks, economies of scale, and product differentiation.
International firm is able to command higher revenues due to superior quality of the product made by the foreign firm affiliate, it’s superior organization, international brand recognition, etc.
(Aliber, 1970; Arpan, et al. 1981; Dunning, 1980; Dunning and Rugman, 1985; Fayerwather, 1982; Kindelberger, 1970, Morgan and Katsikeas, 1997).

7. Data from 2010. Source: Fortune/CNN Money, IMF
If Nike was a country…
Nike Revenue: $19.16 Billion
Paraguay GDP : $18.48 Billion
Country Ranking : 102
Data from Source: Fortune/CNN Money, IMF

8. INTERNATIONAL PRODUCT LIFE CYCLE THEORY
explains the change from the export option to the direct investment option
three stages - new product, maturing product, and standardized product.
domestic production begins in stage 1, peaks in stage 2, and slumps in stage 3. Exports by the innovating firm’s country also begin in stage 1 and peak in stage 2. By stage 3, innovating firm’s country becomes a net importer of the product.
stage like evolutionary pattern of the diffusion of a new product or technology across national boundaries and of production locations across time and space. (Kotabe, 1989)

9. If McDonald’s was a country….
McDonald’s Revenue : $24.07 B
Latvia GDP : $24.05B
Country Ranking: 92
Data from Source: Fortune/CNN Money, IMF

10. TRANSACTION COST THEORY
Firms choose alternative arrangements that minimize the sum of production and transaction costs
Production costs consist of costs incurred during the transformation of various into product and services (Culpan, 1993).
Transaction costs refer to the expenses incurred for writing and enforcing contracts, for haggling over terms and contingent claims, Kogut (1988)
Transaction cost theory predicts that strategic alliances are designed to achieve a minimum cost arrangement, (Culpan, 1993).

11. If Pepsi was a country…. Pepsi Revenue: $ 57.83B Oman GDP: $55.62B
Country Ranking: 69
Data from Source: Fortune/CNN Money, IMF

12. THEORY OF INTERNALIZATION
Internalization theory was developed to provide an economic rationale for the existence of MNEs.
This theory rests on two general axioms (Buckley, 1988):
- firms choose the least cost location for each activity they perform;
- firms grow by internalizing markets up to the point where the benefits of further
internalization are out weighed by the costs.

13. LEARNING THEORY
. The model has a stage like approach to the internationalization process.
firms start off with low risk entry options (exports) and overtime with increased market knowledge increase their foreign market commitment (subsidiary)

14. COMPETITIVE ADVANTAGE THEORY
the advantage of a firm relative to another firm for a certain period of time (Porter, 1980).
Competitive advantages generally do not last forever and thus firms must attempt to benefit maximally from their temporary relative advantages (Buckley, 1990).

15. ECLECTIC THEORY
first put forward the eclectic paradigm at a Nobel Symposium in 1976 (Dunning, 1995).
combines ownership advantage, location advantage and internalization advantage (OLI) to form a unified theory of FDI
Dunning revised the theory to reflect the rise of what he terms as “alliance capitalism” (1995).

16. Bangladesh (104.92) General Motors (135.59) 58
Country (GDP) in $Billion
Firm (Revenue) in $Billion
Firm Ranking as a country (out of 158)
Norway (414.46)
Walmart (421.89) 25
Thailand (318.85)
Exxon Mobil (354.67) 30
Czech Republic (192.15)
Chevron (196.34) 46
Pakistan (174.87)
Conoco Phillips ) 48
Peru (152.83)
Fannie Mae (153.83) 51
New Zealand (140.43)
General Electric (151.63) 52
Hungary (128.96)
Berkshire Hathaway (136.19) 57
Bangladesh (104.92)
General Motors (135.59) 58
Vietnam (103.57)
Bank of America (134.19) 60
Angola (86.26)
Wells Fargo (93.25) 62
Libya (74.23)
Proctor and Gamble (79.69) 64
Sudan (68.44)
Costco (77.94) 65
Croatia (60.59)
Microsoft (62.48) 66
Ecuador (58.91)
Apple (65.23) 68
Oman (55.62)
Pepsi (57.83) 69
Lebanon (39.25)
Cisco (40.04) 81
Uzbekistan (38.99)
Morgan Stanley (39.32) 82
Kenya (32.16)
Amazon.com (34.2) 86
Latvia (24.05)
McDonald’s (24.07) 92
Dem. Republic of Congo (13.13)
Consolidated Edison (13.33)
112
Paraguay (18.48)
Nike (19.16)
102
Madagascar (8.35)
eBay (9.16)
129
Zimbabwe (7.47)
Visa (8.07)
133
Mongolia (6.13)
Yahoo (6.32)
138
Data from Source: Fortune/CNN Money, IMF