Introduction to Global Strategy The Importance of Institutions in International Business

Introduction to Global Strategy

This note introduces the subject of global strategy by focusing on issues that companies deal with as they globalize. A company’s strategy is based on its activity choices; selecting any combination of functional activities involves trade-offs. Global strategy considers that any functional activity can be performed in a company’s home country or a foreign country. Whereas corporate strategy involves diversifying a company across industry boundaries, global strategy involves diversifying some or all of a company’s activities across national borders. Both corporate and global strategy are about discerning market failures and devising activities that substitute for missing or incomplete markets, or both. It is possible to have both kinds of diversification, corporate and global, simultaneously. This note examines when it is profitable for a company to position part or all of its activities across national borders and how a cross-border business is successfully designed and managed.

The Importance of Institutions in International Business

Even in a world with near-seamless telecommunications, generally affordable air travel, and the Internet, countries continue to differ significantly in cultural beliefs, languages, religions, legal institutions, rules of trade, and political systems. These so-called institutional differences across countries profoundly influence the nature of globalization and enable certain opportunities for successful global business strategy while precluding others.

Institutional differences greatly affect trade and strategic investment between countries. A country’s wealth and physical location do affect trade; trade falls, on average, 1% for every 1% increase in the physical distance between any pair of trading countries. Trade also rises with the size of economies, but somewhat less than proportionately. But institutional differences affect trade far more than geographic or economic factors. Economists have shown that, controlling for economic size and physical distance, shared language increases trade between countries by 200%. Studies indicate that preferential trading arrangements, common currency, and political union increase trade by 300%. Having a historical colony-colonizer link might increase trade between countries by as                 1much as 900%. A recent study by Siegel, Licht, and Schwartz (2006) also shows that cultural beliefs about the need to curb abuses of market power are an important determinant of cross-border flows of equity, debt, and mergers and acquisitions. Companies are more likely to invest where their countries’ beliefs are shared; thus, companies in countries that impose stricter constraints on abuses of market power are (controlling for other explanations) more likely to invest in foreign countries that do likewise. Conversely, companies in countries that more often tolerate abuses of market power are, again controlling for other potential explanations, more likely to invest in foreign countries with a

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Professor Jordan Siegel wrote the original version of this note, “Introduction to Global Strategy,” HBS No. 705-465, which is being replaced by this version by Professor Jordan Siegel. This note was prepared for the sole purpose of aiding classroom instructors in the Strategy course.

Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

Module Note—Introduction to Global Strategy

similar bent.2 This likely reflects managers’ intuition that fundamental strategic and organizational  3choices need to be adapted to both formal and informal rules of conduct in the home environment.

Markets function because they have underlying institutions that enable and constrain certain transactions. Strong legal institutions that are transparent and protect property rights are demonstrably good for development; they often give outside investors the confidence to share their resources with companies in need of finance. Weak legal institutions deter investment by outside investors and tend to lower market valuations for companies’ assets. Yet even countries eager to protect property rights find it difficult to combine new legal institutions patterned on foreign models with existing institutional norms and practices.

Companies in emerging economies have sought to circumvent the weak local institutions that impede their development by accepting voluntary compliance with U.S. securities laws in exchange for having their shares listed on a major U.S. stock exchange. A problem with this remedy, however, is that U.S. regulators must often rely on foreign regulators to gather the evidence necessary to enforce U.S. laws. A study by Siegel (2005) has shown that global law enforcement across borders is so ineffective and vulnerable to corruption in many foreign countries that U.S. securities laws are often enforced weakly even amid open violations. Because effective law enforcement requires foreign regulators to cooperate fully in evidence-gathering and asset seizures, outside investors must rely on foreign companies’ concern for reputation.4 The difficulty of raising the quality of legal institutions around the world or enacting global enforcement of U.S. securities laws suggests that institutional differences across countries will continue to be a strong determinant of investment level within and across borders.

These differences underscore the reality of a world with many competing models of how to produce the same product or service, rather than a convergence of one best set of economic and institutional practices. 5 Because both knowledge and tastes are location-specific, companies operating in the same industry around the world are often distinct in terms of strategic activities, organizational practices, and product development. Historical differences in cultures, laws, availability of technology, and organizational customs engender separate equilibrium models of production that can be different even when tastes transcend borders.

This is not to suggest that every country is an island; similarities among countries are considerable, and significant progress has been made toward market integration. Similarities support companies’ strategic adaptation to conditions in diverse locations. Also, similarities support companies’ attempts to realize significant economies of scale by carrying out certain activities in a central location. Lastly, many differences among countries can be transformed from obstacles into business opportunities. As discussed later in this note, arbitraging country differences can often provide substantial profit-generating opportunities.6

Three types of opportunities constitute Pankaj Ghemawat’s three As of global strategy: adaptation, aggregation, and arbitrage.7 Adaptation is about modifying an existing business model to foster success in a foreign environment. Aggregation is about performing a strategic activity in a centralized location, building economies of scale, and selling the output of the activity to diverse foreign markets. Arbitrage is about recognizing that market failures occur when different national or regional markets are connected. These market failures often coexist with long-term differences in costs or valuations of company output. Such market failures can be exploited by locating company activities where costs are lowest and selling the output of those activities where valuation is highest. Just as there would be no need for companies if markets worked efficiently for all types of transactions, global companies would not exist if there weren’t ongoing institutional barriers to the exchange of capital, labor, knowledge, and technology.

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Adaptation Strategy

Adaptation is invoked by a multinational company that seeks, for example, to expand a business unit horizontally across countries. An example is MTV, which has created sister stations across much of Europe and Asia. Before setting up shop in a foreign country, management needs to comprehend the elements of the home-market activity set that have been essential to the company’s success. The company must understand its source of competitive advantage in order to determine whether foreign host countries will support the transplantation of those strategic elements. Some countries make it prohibitive to enter their markets, if not through outright protectionism, then at least through product and labor regulations, antitrust enforcement, zoning laws, and other policies.

In the current era of globalization, it is usually possible to transplant the central elements of a company’s strategy. But the culture and institutions of foreign host countries might dictate that other important elements of a company’s strategy be tailored to the local market. When, for example, global restaurant chains such as Pizza Hut and Kentucky Fried Chicken establish affiliates in South Korea, they can continue to offer their core product mix of hamburgers, fried chicken, and pizza, but must also provide items with kimchi, chili pepper, soybean paste, and other local ingredients. Importantly, adaptation is often not just about making do under local constraints, but about leveraging unique local opportunities for higher returns. For example, multinational companies might have an advantage in recombining local products and services with home-country output, to produce ever more novel and value-creating products. Multinationals might also establish internal norms and processes for adapting useful innovations originated in one host-country subsidiary to all sufficiently similar markets. Lastly, in foreign host markets that lack essential institutions for market development, multinationals might be able to substitute, for example, as guarantors for transactions that would otherwise not have taken place. The process of adaptation for a multinational thus involves not only importing its business model but also serving in such capacities as venture capitalist, banker, or educator to facilitate various types of local transactions.

It is sometimes more appropriate to expressly choose not to change any significant feature of an activity set, but rather to target a defined set of receptive consumers. Mexican broadcasters, for example, quickly discovered that they could earn sizeable profits from simply exporting the same telenovelas produced for Mexican viewers to a targeted Hispanic demographic in the United States and other countries. At other times it makes more sense for a multinational to endeavor to transform the local environment; witness Star TV’s attempts to shape the regulatory environment for satellite telecommunications around the globe.

Aggregation Strategy

Another set of opportunities revolves around aggregation: finding similarities in national markets and producing a standardized product for these markets. Serving multiple markets with standardized products can yield economies of scale. Of course, many companies see scale economies where none exist and perceive nonexistent similarities between markets. When scale economies are real, however, and in markets that value standardized products produced more economically and sold more cheaply, aggregation strategies can be profitable. Hyundai Heavy Industries, for example, a shipbuilder that historically benefited from scale economies by producing a standardized design for one global shipping market, designs common products for global application and then markets them aggressively around the world.

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Arbitrage Strategy

Arbitrage is one of the opportunities available to companies that want to take advantage of location-specific differences. Companies that arbitrage labor-cost differences by locating more labor- intensive activities in countries with low labor costs, for example, will realize an absolute economic advantage. But because activities that involve sourcing (e.g., from China) can be imitated, any advantage can be quickly lost. Nor do first movers always have it easy, often encountering formidable hurdles as they attempt to navigate new institutional environments. Yet significant risk is also incurred by followers, inasmuch as the earliest entrants might seize absolute economic advantages and invest profits in their broader set of activities.

Arbitrage is not limited to labor differences; R&D, production, human resources, IT, and marketing activities can also be arbitraged across national borders. Some multinationals, for example, finance much of their activity with cheap sources of capital located in foreign markets.8 On occasion, unique production technologies, product designs, and marketing practices can be transplanted to other national contexts in which their value is even greater than in the home market.

AAA Strategies Involve Trade-offs, but Are Not Mutually Exclusive

Most companies must choose whether to be low-cost or differentiated; typically they cannot be both. A company cannot offer all types of products to all types of consumers. In making decisions about its global strategy, a company must often consider adaptation, aggregation, and arbitrage opportunities simultaneously. Certainly, many strategic choices among these three A strategies will entail trade-offs, particularly in the areas of organization design and organizational strategy. (See Reconfiguring the Global Organization later in this note.) For example, aggregation requires centralized production and decision-making, whereas adaptation often requires a more decentralized organizational design. Companies with little experience with global strategy will often find it most effective to concentrate on building a coherent strategy around one of the As before attempting to do so for two or three concurrently. The stress of trying to formulate strategies around multiple As simultaneously can overwhelm any organization that lacks a strong competitive advantage and advanced knowledge of how its strategic choices relate to one another.

Yet the trade-offs involved in pursuing the AAA strategies concurrently are seldom as complex as the trade-offs faced by companies that attempt to pursue low cost and differentiation simultaneously. Moreover, companies often see no choice but to formulate strategies for more than one of the As. Even as a company tries to standardize a good or service for global sales, it might want to explore opportunities to arbitrage production. Instead of producing a standardized product at one location for global application, a company might achieve partial scale economies by adapting its home- country business model slightly for local use in a foreign subsidiary. The local modification gives the basic business model broader application, enabling people and ideas to be shared across borders. Other intermediate strategies include platform or front-to-back approaches, whereby core features of an activity set are enacted globally while others are modified for local purposes, and clustering, whereby standardization is focused not on complete global application but on a cluster of similar countries based on regional colocation or shared culture.9

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Global Activities: In-House versus Market

Once a company decides that it can benefit from a global strategy, it must next determine whether overseas production, sales, and sourcing of talent and capital can be negotiated through the market. The market is the preferred avenue for global expansion when all of these activities can be efficiently handled. Multinational companies exist because markets fail; when markets function poorly or are nonexistent, it makes sense to perform activities within the company.

As highlighted by Hennart (1982), markets support economic exchange and value creation principally for the following reasons.10

1.

2.

Market prices provide strong incentives for value-creating actions. In a well-functioning market, actions that create more value are rewarded with higher prices. If a project is going to involve multiple investments over time, or is going to generate returns that will be received at different times far into the future, an entrepreneur needs a well- functioning market to lock in prices for goods delivered at a future time. Information about future prices will enable the entrepreneur to estimate the future costs and returns of a multistage project. Better estimates of future costs and returns enable investment to proceed with more value-creating projects than would otherwise occur in an environment of high uncertainty.

As highlighted by Buckley and Casson (2002) and Rugman (1981), the following are among the situations in which markets often fail and where it makes sense for companies to own their activities.11

1.

Two companies’ cooperative production of a joint output involves numerous time lags and intermediate deliveries. How are the companies going to set prices for each other for these intermediate deliveries, going forward?How might the companies accommodate adjustments to those prices in the event of unexpected contingencies? If a well-functioning market exists to apprise the companies of prices set today for future deliveries of comparable goods, a contract tied to knowledge of market prices could be executed. Without a well- functioning market and the information it provides about prices, costly haggling over the setting of future prices might jeopardize profitable opportunities for one or both companies. The solution is often for the companies to merge and assign to one senior management team responsibility for all decisions related to internal-transfer pricing. Price negotiations for an ongoing set of transactions between a monopoly seller and a monopoly buyer are likely to devolve into costly haggling. Each side can materially threaten to prevent the other from being able to produce an intended output. An immediate solution might be to execute a long-term contract that attempts to define all possible contingencies and prescribe both parties’ responses to each contingency. In the event that contingencies elude prediction or specification, companies are often well-advised to avoid contracting and instead merge. A prospective seller of proprietary knowledge is unable to reveal the true and complete nature of that knowledge without, in effect, giving it away for free, and a prospective buyer, knowing that the seller has more knowledge, faces considerable uncertainty in agreeing to the price being asked. To avoid costly haggling, the seller can eliminate the risk by acquiring the buyer’s business or establishing a new internal operation to compete with the buyer. The value of a knowledge product is known, but there is an aspect of such products that can occasion market failure. We presume that considerable investment was required to produce this knowledge, but its ongoing use incurs zero (or almost zero) marginal cost of production. A competitive market would set the price of the knowledge close to zero, the marginal cost,

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but the monopoly owner would then have little or no incentive to sell the knowledge. Even if the owner wanted to sell, prospective buyers would worry that the owner might have an incentive to flood the market with other sales at even lower prices in the future. Because knowledge once produced can often be transferred at low or zero marginal cost, it takes on the character of a public good. Markets are notoriously inefficient at pricing and providing adequate incentives through prices for sellers to want to sell—and buyers to want to buy— public goods. Because of this, it often makes sense for sellers and buyers of public goods to merge and decide jointly how best to maximize the profitability of the knowledge.

Besides market failure, companies might have three other motivations to own their foreign activities.

1.

For a company that has developed and exploited a competitive advantage to build market power in its home market, what might be the incentive for it to extend its competitive advantage and market dominance to other geographic markets? Extending delivery of its products and services to as many geographic markets as can be profitably served might enable the company to (a) optimize returns on its prior investment in competitive advantage, and (b) preempt the creation or consolidation of foreign competitors. With respect to (b), the company might worry that foreign partners to which it licenses its technology (or other aspects of its competitive advantage) will gain the expertise to one day challenge it in its own market. Fear of creating future foreign competitors might lead the company to attempt to either buy out local incumbents in the foreign host markets or establish a large enough foreign presence to discourage potential competitors through vigorous competition. This “market power” explanation of foreign ownership has explained the nature of foreign direct investment in a number of industries and time periods.12 Duties and taxes imposed by local host governments on market transactions and local income are often sufficient incentive for multinational companies to internalize greater numbers and more types of transactions, which in turn provides a legal incentive for the company to set prices for intermediate goods and decide where within its network of affiliates to declare profits.13 In the event that the market works for pricing the sale of a given technology, but transfer of the technology involves internal tacit knowledge that is difficult to explain or teach, a multinational might find that even within the context of a well-functioning market, it can realize greater profit from owning the foreign transfer and application of its technology. In other words, the company itself might be the low-cost replicator of knowledge that is intrinsically difficult to transfer to foreign operations.14

2.

3.

As highlighted by Buckley and Casson (2002), we can thus identify specific circumstances under which one is likely to see ownership of activities that extend across borders.15

1.

Research and development projects are often lengthy, requiring both long-term evaluation of returns and short-term coordination of multiple sources of project input. In the absence of well-functioning markets that can deliver price information, a company can often benefit from internalizing a long-term research and development project or its implementation across borders. Team processes are often applied to some of the knowledge-generating tasks needed to create value within a company. With teams, though, it can be difficult to verify and assign a value to individual contributions through a formal market contract. Consider a retail clothing store that needs information from its store managers about what individual customers think the store is not providing but that they want to buy. The company might

2.

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3.

4.

find it difficult to write a market contract stipulating that the store will compensate the manager who provides a certain type or quantity of customer information with a certain amount of money. Because stores might have difficulty knowing ex ante how the market will value managers’ information, and managers, knowing that stores will find it difficult to compensate them directly and accurately for their information, will have little incentive to devote time to gathering information, it often makes sense for stores to make store managers into company employees and internalize the task of collecting customer feedback within stores. A range of human resource practices can be used in conjunction with long-term evaluation to build trust and reputation with employees. Because it can be difficult to assign a value to a single contribution made on a given day, companies can use repeated evaluation and supervision to fairly judge and compensate employees over time. Such up-and-close interaction, together with accumulated company-level trust and reputation, can motivate employees in a well-managed company, whose individual contributions might be difficult to verify and directly compensate in every instance, to nevertheless make significant investments of time that contribute to the company’s success. Buyer uncertainty with respect to the true value of a knowledge-based product is likely to deter successful market exchange, when the knowledge is difficult to patent or otherwise protect legally. Consequently, it often makes sense for the seller of an unpatentable knowledge product, the nature of which cannot be divulged without effectively giving it away for free, to forward-integrate into the buyer’s business. Knowledge is a public good, and because of the zero or non-zero marginal cost of producing a public good, sellers will see market prices set too low and buyers worrying that the sellers might try to maximize profits by later selling the knowledge at ever lower prices to others who might compete with the original buyers. Companies sometimes address this circumstance by carving up defined geographic boundaries within which their licensees can do business, but it can prove costly to police licensees across geographic boundaries. It is often more cost-effective for the original producer of the knowledge to internalize and own the knowledge-based activity even as it is transplanted to other countries.

In summary, multinational companies, like other purely local companies, bring market activities within the organization whenever the marginal benefits and costs of the activities are not being accurately reflected in market prices.16 As one learns from the study of competitive advantage, a company might discover a unique combination of activities and go on to master coordination of the constituent elements. If the knowledge needed to coordinate the activities becomes too complex to be taught and implemented cost effectively outside the company, it clearly makes sense for the company to own and direct its global expansion.

Organizational Modes of Market Entry

A company that decides that its new global activities should be performed within the organization must also decide whether to extend some degree of minority ownership to local partners more knowledgeable of foreign institutions. Specifically, should the company expand through 100% ownership and control, or through shared control with an outside partner? Multinationals, because they fear financial expropriation and loss of intellectual property, tend to prefer complete control over their subsidiaries. Although some of this fear is rational, some of it masks underlying managerial biases toward control and empire-building. Companies that take on an outside partner often do so to acquire (1) market knowledge that foreign investors cannot easily purchase, (2) control over a key segment of the local value chain that would otherwise block entry, or (3) access to political connections and the inexpensive resources (such as finance and technology) that can be acquired

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from them. Local governments sometimes use policy to compel foreign investors to engage local partners; in 2005, for example, the Chinese government still required foreign investors in many industries to seek out Chinese partners.17

A foreign investor that chooses to invest with the help of a local partner must determine the structure of the relationship. One dimension of partnership structure relates to control. A joint venture is a shared, legally defined entity owned in specified percentages by the foreign investor and outside partner. Strategic alliances and other types of partnerships that do not necessarily exist in legal form leave issues of control more open to negotiation and change. Until the 1990s, foreign investors tended to pursue joint ventures and surrender some control over joint assets. But because they value control over their assets, companies tend to give up control rights only when they are paid or compelled to do so. Recent research confirms that host-country governments’ elimination of restrictions on investment has served as a disincentive for U.S. companies to participate in joint ventures.18

Foreign investors that decide to enter emerging economies must consider additional issues. Expropriation is a serious concern in any country in which legal institutions are weak and political discretion is high. A politically connected local company can just as easily use its connections to directly expropriate its foreign partner. Expropriation is thus a concern with respect to not only local governments but politically connected local firms.19

Foreign companies have used various strategies for reducing the risk of expropriation. Most commonly, they have sought to maintain control over the most valuable resources, including the flow of knowledge and finance to the local partner. Some have created strong incentives for local partners to jointly maximize profits and then have carefully monitored the local partners through joint control of the shared assets. Other foreign companies have split activities across borders and rented foreign legal jurisdictions to deal with contract disputes. Foreign investors that face discrimination in their host countries sometimes form consortia or seek home-government support to lobby for property- rights protection. Foreign companies have also taken on locally respected and influential passive investors, trained their suppliers in global best practices, paid above-market wages and salaries, and made contributions to local institutions such as universities and research institutes, to diminish the liability of “foreignness”; by doing so they hope local customers, business partners, and host governments will perceive them as at least nominally “local” companies.20

Reconfiguring the Global Organization

A foreign company that has expanded to a new country must determine whether that expansion requires a reorganization of its global operations to improve operational effectiveness and productivity. Many companies change their organizational structure as they become more globally diversified.21 As we learned earlier in strategy and organizational behavior courses, companies seek to foster internal consistency between functional practices and organizational design. Consequently, companies that adopt an aggregation-oriented strategy for global operations tend to be more centralized to ensure that decision-making authority and accountability are located where the key strategic decisions are being made. For products being standardized and sold in similar ways around the world, layers of bureaucracy between the central site and global sales offices are unwanted. Aggregators therefore tend to organize around either a central home office or a set of product divisions that have global responsibility for production and sales.

Companies that have chosen an adaptation strategy often put organizational power closer to the individual country market. If they choose to customize products for local applications, they typically

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invest decision-making authority and accountability in the managers closest to the consumers. Such companies tend to organize around strong, country-level subsidiaries and empower local managers to make critical decisions about product development and marketing.

Companies that seek to benefit from adaptation, aggregation, and arbitrage or who are driven by competitors to do all three, will face the greatest organizational challenge. Companies that successfully adapt, aggregate, and arbitrage are able to centralize certain key activities at headquarters, leave others in the hands of local operations, and distribute still others to specialized locations around the world. But the requisite combination of centralization, decentralization, and regional agglomeration creates organizational frictions that few companies have been able to overcome. There are, nevertheless, some examples of companies that have mastered numerous aspects of this managerial challenge.22

Conclusion

Companies that seek to become more global must carefully evaluate location-specific institutional differences among countries. They must measure these differences precisely and determine whether market failures provide opportunities to expand their business across borders. To do this effectively they need to learn how foreign markets are structured. Often, as a 2001 study showed, an industry that is highly concentrated and profitable in one country can have a far less attractive industry structure and be unprofitable overseas.23 This circumstance results directly from institutions that have acted over decades to affect company entry, means of finance, and production technology and influence consumer tastes and preferences. Failure to study these differences carefully and devise new ways to benefit from them can damage a company that currently enjoys a competitive advantage in its home market. Careful study of these cross-country differences, on the other hand, often reveals market failures that can be turned into global opportunities for adaptation, aggregation, or arbitrage, or some combination thereof. Having selected a set of global activities, a company must align its organizational practices and other functional activities with its new global strategy.

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Endnotes

The results reported in this paragraph are from Jeffrey Frankel and Andrew Rose, “An Estimate of the Effect of Common Currencies on Trade and Income,” Quarterly Journal of Economics 117 (May 2002): 437-466. For a description of different types of cultural and institutional distance and how they affect globalization, see Pankaj Ghemawat, “Distance Still Matters: The Hard Reality of Global Expansion,” Harvard Business Review 79 (September 2001): 137–147.

See Jordan I. Siegel, Amir Licht, and Shalom Schwartz, “Egalitarianism and International Investment,” unpublished working paper (Boston: Harvard Business School, 2006).

See Jordan I. Siegel, Amir Licht, and Shalom Schwartz, “Egalitarianism and International Investment,” unpublished working paper (Boston: Harvard Business School, 2006).

Although companies can still benefit enormously from cross-listing, the process is primarily one of reputational bonding. Companies signal their quality by listing on a major U.S. exchange, then prove their quality by respecting outside shareholders’ rights and assets during both good and (especially) bad economic times in the company’s principal market of operation. For more information on reputational bonding, see Jordan Siegel, “Can Foreign Firms Bond Themselves Effectively by Renting U.S. Securities Laws?” Journal of Financial Economics 75 (February 2005): 319–359.

For an illustration of how institutional differences prevent global convergence in production methods, see Mauro Guillén, The Limits of Convergence: Globalization and Organizational Change in Argentina, South Korea, and Spain (Princeton: Princeton University Press, 2000). For an example of how institutional regimes foster different norms of business organization, see Tarun Khanna and Krishna Palepu, “Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups,” The Journal of Finance 55 (April 2000): 867–891.

A world characterized by neither complete market integration nor isolation has been termed “semiglobalization” by Pankaj Ghemawat, who explains this concept and what it means for strategy in “Semiglobalization and International Business Strategy,” Journal of International Business Studies 34 (March 2003): 138–152.

For more on the concepts of adaptation, aggregation, and arbitrage, see Pankaj Ghemawat, “The Forgotten Strategy,” Harvard Business Review 81 (November 2003): 76–84.

Ann E. Harrison and Margaret S. McMillan, “Does Direct Foreign Investment Affect Domestic Credit Constraints?” Journal of International Economics 61 (October 2003): 73-100. See also Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., “A Multinational Perspective on Capital Structure Choice and Internal Capital Markets,” The Journal of Finance 59 (December 2004): 2451–2488.

For a more complete description of these intermediate strategies, see Pankaj Ghemawat, “Semiglobalization and International Business Strategy,” Journal of International Business Studies 34 (March 2003): 138–152. For empirical evidence on the importance of regional strategies for multinational firms, see Alan M. Rugman, The Regional Multinationals; MNEs and ‘Global’ Strategic Management (Cambridge: Cambridge University Press, 2005).

This section draws on Jean-Francois Hennart, The Theory of the Multinational Enterprise (Ann Arbor: University of Michigan, 1982).

The following section draws on Peter J. Buckley and Mark C. Casson, The Future of the Multinational               thEnterprise (25 Anniversary Edition) (New York: Palgrave Macmillan, 2002). It also draws on Alan M. Rugman, Inside the Multinationals; The Economics of Internal Markets (London: Croom Helm, 1981). For useful textbook treatments of these subjects, see Alan M. Rugman, Donald J. Lecraw, and Laurence D. Booth, International Business: Firm and Environment, 2nd ed. (New York: McGraw-Hill, 1985); and Alan M. Rugman and Richard M.rdHodgetts, International Business; A Strategic Management Approach, 3 ed. (Harlow, England: Pearson Education, 2002).

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See Stephen Hymer, The International Operations of National Firms (Cambridge: MIT Press, 1976); Frederick T. Knickerbocker, Oligopolistic Reaction and the Multinational Enterprise (Cambridge: Harvard University Press, 1973); and Pankaj Ghemawat and Catherine Thomas, “Multinational Enterprises in the Cement Industry: Firm Interaction and Foreign Direct Investment,” unpublished working paper (Boston: Harvard Business School, 2005).

See Peter J. Buckley and Mark C. Casson, The Future of the Multinational Enterprise (25 Anniversary Edition) (New York: Palgrave Macmillan, 2002).

For the first mention of this concept, see Frederick T. Knickerbocker, Oligopolistic Reaction and the Multinational Enterprise (Cambridge: Harvard University Press, 1973). This argument has been more extensively advocated by Bruce Kogut and Udo Zander, "Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation," Journal of International Business Studies 24 (1993): 625–645.

The following section draws on Peter J. Buckley and Mark C. Casson, The Future of the Multinational               thEnterprise (25 Anniversary Edition) (New York: Palgrave Macmillan, 2002).

For more information, see Richard E. Caves, Multinational Enterprise and Economic Analysis (Cambridge: Cambridge University Press, 1982/1996) and Jean-François Hennart, A Theory of Multinational Enterprise (Ann Arbor: University of Michigan Press, 1982).

The classic texts on foreign direct investment are Stephen Herbert Hymer, The International Operations of National Firms: A Study of Direct Foreign Investment (Cambridge: MIT Press, 1976) and Yair Aharoni, The Foreign Investment Decision Process (Boston: Harvard University Press, 1966).

See Mihir Desai, C. Fritz Foley, and James R. Hines Jr., “The Costs of Shared Ownership: Evidence from International Joint Ventures,” Journal of Financial Economics 73 (2004): 323–374.

For more information on the risks of local partnering, see Witold J. Henisz, “The Institutional Environment for Multinational Investment,” Journal of Law, Economics & Organization 16 (October 2000): 334–364; and Witold J. Henisz and Oliver E. Williamson, “Comparative Economic Organization—Within and Between Countries,” Business and Politics 1 (November 1999): 261–276.

See Theodore H. Moran, Multinational Corporations and the Politics of Dependence: Copper in Chile (Princeton: Princeton University Press, 1974); Jonathan Eaton and Mark Gersovitz, “Country Risk: Economic Prospects,” in Managing International Risk, ed. Richard J. Herring (Cambridge: Cambridge University Press, 1983); Raymond Vernon, “Organizational and Institutional Responses to International Risk,” in Managing International Risk, ed. Richard J. Herring (Cambridge: Cambridge University Press, 1983); and Witold J. Henisz and Bennet A. Zelner, “Political Risk Management: A Strategic Perspective,” in International Political Risk Management, ed. Theodore H. Moran (Washington, DC: World Bank, 2004).

See John M. Stopford and Louis T. Wells, Jr., Managing the Multinational Enterprise; Organization of the Firm and Ownership of the Subsidiaries (New York: Basic Books, 1972).

For more information on so-called “transnational firms,” those that learned how to centralize, decentralize, and network different activities at the same time, see Christopher A. Bartlett and Sumantra Ghoshal, Managing Across Borders: The Transnational Solution, 2nd ed. (Boston: Harvard Business School Press, 1998). For further case illustrations of transnational management, see Christopher A. Bartlett, Sumantra Ghoshal, and Julian Birkinshaw, Transnational Management: Text, Cases, and Readings in Cross Border Management, 4th ed. (Boston: McGraw-Hill, 2004).

See Tarun Khanna and Jan Rivkin, “The Structure of Profitability Around the World,” unpublished working paper no. 01-056 (Boston: Harvard Business School, 2001).