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Why should the Firm go Abroad?There are both organizational & environmental reasons:Organizational Reasons are:Exploiting worldwide market imperfections:Since there is no perfect market exist in the real world, therefore, the essence of competitive advantage is a firms ability to create and sustain economic profits in an imperfect marketplace for products & factors. For Products: to produce differentiated productsFor Factors: cheaper inputs in foreign locations (p.11)2. Exploiting the Opportunities that arise along the life cycle of a firms product:

As Raymond Vernon suggests that there are three stages of Business Life Cycle- i.e. Introduction/ growth; maturity and standardization/ decline

Therefore , the product life cycle theory predicts that initially the comparative advantage will exist in the innovating country with export based MNEs. However over time, as the product becomes standardized, the country of comparative advantage will shift to lower cost locations by increasing move towards direct investment abroad. (p.12)

Environmental or External reasons are:

Responding to the Macro-economic imperatives for globalization: MNE & Macro forces of GlobalizationThere are three main macro forces:Globalization of capital markets (including the growth and volatility of current markets and interest rates);The decline costs of transportation and communication & the growth and reach of Information Technology; (pp.13-14)The growth of regional and international trading arrangements 2. Exploiting the competitive advantage of NationsMichael Porter argued that comparative advantage and factor endowments are not just inherited or given at the country level, rather created by the firms that undertake innovation in these countries. He identified four determinants of this competitive advantage of nations:Factor conditions: Do the nations factor of production help a firm compete successfully in a given industry?Does the nation provide a platform in which these factors can be continuously upgraded and deployed in new ways? (pp.16-17)2. Demand conditions:Are local markets highly demanding of the firm in terms of price & non-price factors as well as in the quality of what it produces and sells?

3. Related & Supporting Industries: (pp.18-19)Are there related and supporting industries as well suppliers that enable the firm to maintain close working relationships, have proximity to those suppliers and ensure timeliness of product and information flows?4. Firm structure, strategy and rivalry:Do the firms in the domestic economy have structures and strategies that make them flexible and effective competitors?Is there vigorous rivalry among firms in various industries, and local laws and institutions encourage such rivalry? Porter further argues that any country who fulfils these conditions may emerge as globally competitive and will flourish. While there are as yet no comprehensive empirical tests of whether and the degree to which each of these factor affects a firms ability to compete globally. However, there are many industries which support Porters hypothesis. Example include the semiconductor and the software industries in the U.S.; Automotive & electronics industries in Japan and footwear industry in Italy to name few. MNE: THE MODE OF FOREIGN ENTRYEXPLOIT COMPETITIVE ADVANTAGE THROUGH ENTRY ABROADPRODUCT AT HOME AND EXPORTPRODUCE ABROADLICENSING OR MANAGEMENT CONTRACTMAINTAIN CONTROL OVER ASSET ABROADJOINT VENTUREMAJORITY OR WHOLLY OWNED AFFILIATEBUILD FROM SCRATCHACQUIRE OR MERGEThere are two sets of ideas that provide guidelines for firms in making their foreign entry decision: The Theory of Internalization based on the economics of Transaction Costs of activities undertaken by the firm.The impact of the two environmental variables that are unique to the MNE i.e. Multiple Sources of External Authority (MA) and Multiple Denominations of Value(MV) MNE & Internalization of Transactions in the Choice of Mode of EntryThe theory of Transaction Cost Economics(TCS) argues that transactions (defined to be transfers of goods and services across a technologically separable interface) in market settings may be prone to friction & failure, resulting in transaction costs for firms undertaking them. Transaction or exchanges that are more likely to entail such costs are characterized by three attributes:They have asset specificity- the asset involved in the transaction cannot be redeployed to alternative uses or users without loss in value;There is likelihood of a greater frequency of interaction between the parties to the transaction and There is uncertainty surrounding the outcome of an arms-length transactionThe greater the asset specificity, the higher the frequency of interaction, or the greater the uncertainty, the greater the transaction cost.The TCE logic is that the MNE will internalize through direct foreign investment (i.e. ownership and control of assets abroad) in situations where arms-length contracting modes( i.e. export or contractual modes of entry) are prone to failures. In particular, the MNE will internalize through DFI entry mode when its investment abroad is primarily in the form of knowledge-based assets such as technology, managerial skills, corporate culture/shared value, organizational structure that result in high asset specificity. To sum up: A firm will have the incentives to enter abroad through FDI when the basis of its competitive advantage is derived from non-transferable or non-marketable sources, such as technology, brand equity, R&D and innovation, proprietary information about a product or process. In such instances, there is likelihood that exporting or licensing may not be effective in transferring the competitive advantage or even if it were, there is the likelihood that the knowledge embodied in the asset or the product may be diffused too easily, without the firm being able to capture any profit from it. MNE and the Role of MA and MV in the choice of Mode of Entry:MA Multiple Sources of External Authority: The overriding principle underlying cross-border relationships is that of sovereignty. The sovereignty of a nation-state is embodied in its authority to influence events within its legal territory and its choice to be relatively immune to outside influences. This authority generally manifests itself in terms of laws and regulatory institutions, political institutions, official language(s), norms of behavior, culture. The MNE has exposure to multiple (often conflicting) sources of external authority. There are three aspects of MA that merits consideration:The number of geographic locations that the firm operates in; (21-22) 2. The variance in country environments resulting from operating in different geographic locations and (pp.22-23) 3. The lack of a superstructure to mediate threats or opportunities that arise at the intersections of the variances in country environments.Similarly, under MV (Multiple Denominations of Value) :which means the firms cash flows are denominated in different exchange rates. This in turn, results in three effects on the MNE: (1). translation exposure, which is the problem of ex-post settling up and valuations already undertaken across multiple currencies; (2) transaction exposure , which is the problem of hedging known or anticipated cash flows against future exchange rate shifts; and (3) economic exposure, which is the problem of the impact of unanticipated changes in real exchange rates on the firms competitive position. Therefore, when MA is high, the MNE should choose export of contractual modes of entry and when MA is low, the MNE should choose the DFI mode of entry. MV , however, has the opposite set of implications. When the degree of MV is high, MNE would favor the DFI mode of entry , in order to take advantage of the benefits from asset diversification. However, if MV is low, there is little value to asset diversification and therefore, MNE would prefer export and contractual mode of entry in order to avoid the costs of carrying excess capacity worldwide.The Complex MNE: Nonsequential Entry :In the present era of globalization, many MNEs are complex organizations- multidivisional, multiproduct firms competing simultaneously in multiple-industry categories. Therefore, MNE may make particular choices of entry mode. For example an MNE is having three industries A,B & C may export product A from country X, license product B in country Y and decide to produce C in country Z, where these choices may be determined by a set of firm or industry specific factors relevant to products A,B, & C. Hence, how firms go abroad or their mode of entry is also determined by location or host country specific factors, notably MA and MV. In other words, entry can be nonsequential, depending on the characteristics of the location. (pp.24-25)