Managing the Internationalization Process
Chapter-6
Global Strategic Development
Objectives
n Understand the motives for internationalization;
n Explain the theories underpinning the internationalization process;
n Explain the born global concept;
n Understand the different modes of entry strategies employed by multinational firms;
n Understand the de-internationalisation process.
Introduction
oMotives for Decision to Internationalize
n Organizational Factors
p Decision making characteristics
p Firm specific factors
n Environmental factors
p Unsolicited proposal
p The ‘bandwagon’ effect
p Attractiveness of the host country
Organizational Factors
o Decision making characteristics:
n Foreign travel and experience abroad
n Foreign language proficiency
n The decision-maker background
n Personal characteristics
o Firm-specific factors:
n Firm size
n International appeal
Environmental Factors
o Unsolicited proposal: some unsolicited proposal from foreign governments, distributors, or clients are hard to resist and may stimulate a firm to go international.
o The ‘Bandwagon’ effect: following the leader
o Attractiveness of the host country: market size, high purchasing power, high demand for industrial and consumer goods.
Internationalization Process
How firm Internationalize?
o Johnson & Paul (1975) made two observations about the way in which firm internationalize-
n Firms start exporting to neighboring countries, or countries that are comparatively well known or relatively small ‘Psychic distance ’ :Experiential Knowledge.
n Firms expand their international operation sequentially :Result of Incremental Decisions
Internationalization Process
o Johnson & Paul (1975) identified four successive stages in the firm’s international expansion:
n No regular export activities;
n Export export activities via independent representatives or agents;
n The establishment of an overseas subsidiary;
n Overseas production and manufacturing
Internationalization Process
Johnson & Paul’s (1975) work was further developed and refined by Johnson & Vahlne (1977), who formulated a ‘dynamic’ Uppsala Model – a model in which the outcome of one cycle of events constitutes the input to the next.
Uppsala Model
o The model proposes that internationalization is a gradual process dependent on experiential knowledge and incremental steps.
ü Experiential knowledge: knowledge obtained from experience. Better knowledge leads to stronger market commitment.
ü Incremental steps: expanding operation step by step
Uppsala Model
o Market Commitment: the concept of market commitment suggests that resources located in a particular market presents a firms’ commitment to that market, so FDI means higher market commitment than exporting or licensing.
Market commitment is composed of two factors:
Ø The amount of resource committed: size of investment
Ø Degree of commitment: difficulty of finding & transferring an alternative use for the resources.
Uppsala Model
Market Knowledge
Limitations
o Does not explain what triggers the first internationalization process.
o Does not explain the mechanism by which experiential knowledge of a foreign market affects commitment.
o Uppsala model focuses on Country similarity theory, however, Starbucks expanded their operation first in Japan
Limitations
o The basic assumption of Uppsala model is that lack of knowledge about foreign markets is a major obstacle in the international operations.
However firm can acquire knowledge through external sources. So rather than ‘learning by doing’ firm could also go for ‘learning from imitation’, incorporating people, and forming strategic alliances.
Exceptions
o Firms that have surplus resources and experience can take larger internationalization steps.
o When market conditions are stable and homogeneous, relevant market knowledge can be gained from other sources than experience
o When the firm has considerable experience of market with similar condition, it may be possible to generalize this experience to specific market
Born Global Firm
o A Born Global (BG) firm represents a relatively new breed of the SME (Small and Medium-Sized Enterprise) that undertakes early and substantial internationalization.
o Primarily a niche player, born global display high degree of entrepreneurial orientation, proactiveness, and customer service.
o In the contemporary era, born global make up the fastest growing segment of exporters in most countries.
Born Global Firm
o Born global are typically avid users of the Internet and modern communications technologies, which further facilitate early and efficient international operations.
o Though their limited resources prevent them from engaging in FDI, BG’s can excel in exporting, licensing, and franchising.
n History and Heraldry, a born global in England that specializes in gifts for history buffs and those with English ancestry- It recently opened a North American subsidiary in Florida.
n QualComm, founded in California in 1985, initially developed and launched the e-mail software, Eudora, the firm eventually grew to become a major MNE on the strength of substantial international sales.
Born Global Firm
Characteristics
o Experience early, rapid, and substantial internationalization
o Fewer financial and other resources than traditional exporters
o Formed by technically inclined, market-oriented business people with entrepreneurial drive
o Often enjoy internationally recognized technical eminence and universal appeal in given product category
Born Global Firm
o Emergence often associated with significant product/process breakthrough or innovation
o Products often involve advanced technology, substantial added value, superior quality, and differentiated design
o Internationalization typically via exporting and facilitated through network relationships
o Heavy user of advanced IT and communications technologies
Dunning’s Eclectic Paradigm
o Foreign market entry mode should be a trade-off between Risk and Return.
o Dunning’s Eclectic Framework suggests that firms should consider the following three variables while selecting their entry modes-
n Ownership advantage
n Location advantage
n Internalization advantage
Dunning’s Eclectic Paradigm
o Ownership advantage: Tangible and intangible resources owned by a firm which provide it a competitive advantage over industry. If firms have lower level of OA than it should not enter into the foreign market
o Location advantage: How attractive a specific country is in term of market potential and investment risk. Usually market with high potential and high Investment risk in such market firms prefer high control entry mode
o Internalization advantage: it refers to the benefit of keeping assets and skills within the firm when there exist a potential hazard for opportunistic behaviour by external parties.
Entry Mode Strategies
o Export
Ø Licensing
v Foreign Direct Investment
Export
o The action by the firm to send produced goods and services from the home country to other countries.
o Advantages:
· Does not require a high resource commitment in the targeted country.
· Inexpensive way to gain experiential knowledge and EOS in foreign markets
· Low cost strategy to expand sales in order to achieve economies of scale
· Easy to withdraw operation
Export
o Disadvantages:
n Hard to control operations abroad
n Provides very small experiential knowledge in foreign markets.
o Risks:
n When countries experience major political instability: delays and defaults on payments, exchange transfer blockage, confiscation of property.
n No control over cost: land transport to port, shipping cost, insurance, foreign exchange risk.
Export
Licensing
o The transfer of patented information and trademarks, information and know-how, including specifications, written documents, computer programs, and so forth , as well as information needed to sell a product or service, with respect to a physical territory. 1
o Licensing does not mean duplicating the product in several countries.
Licensing
o Advantages:
· Does not require a high resource commitment in the targeted country
· Can be used as a step towards a more committed mode of entry
· Low cost strategy to expand sales in order to achieve economies of scale.
· Obtain extra income from technical expertise and service and spread around the cost of R&D
· Retain established markets that have been closed or threatened by trade restrictions
· Reach new markets not accessible by export from existing facilities
Licensing
o Disadvantages:
n Hard to monitor partners in foreign markets
n High potential for opportunism
n Hard to enforce agreements
n Provides a small experiential knowledge in foreign markets
Licensing
o Risks:
n Sub-optimal choice
n Risk of opportunism
n Quality risks
n Production risks
n Payment risks
n Contract enforcement risk
n Marketing control risk
Licensing
International Franchising
o Contract based organizational structure for entering new markets.
o It involves a franchisor firm that undertakes to transfer a business concept that it has developed, with corresponding operational guidelines, to non-domestic parties for a fee.
o Franchising allows the franchisor more control over the franchisee and provides for more support from the franchisor to the franchisee than is the case in the licensor-licensee relationship.
International Franchising
o Advantages:
· Require a moderate resource commitment in the targeted country
· Moderate cost strategy to expand sales in order to achieve economies of scale.
· Speedy entry to foreign market
· Retain established markets that have been closed or threatened by trade restrictions
· Reach new markets not accessible by export from existing facilities
International Franchising
o Disadvantages:
n High monitoring cost
n High potential for opportunism
n Could damage firms’ reputation and image
n Does not provide experiential knowledge in foreign markets
International Franchising
o Risks:
Ø Franchisee might not follow the directives of franchisor.
Ø Communicating wrong concept
Ø Potential risk of free-ride by franchisee believing that franchisors efforts are sufficient for the franchise to succeed
Ø Franchisee could try to increase profits by reducing the quality of inputs
Ø A franchise may damage the franchisor image and reputation in the host country, because customers often can not distinguish between franchised and company-owned outlets.
International Franchising
o International franchising is likely to succeed when certain market conditions exist:
n The franchisor has been successful domestically: unique products and/or advantageous operating procedures and systems.
n The factors that contributed to domestic success are transferable to foreign locations.
n The franchisor has already achieved considerable success in franchising in its domestic market.
International Franchising
Foreign Direct Investment
o A firm invests directly in production or other facilities, over which it has effective control, in a foreign country.
o FDI’s require a business relationship between a parent company and its foreign subsidiary.
o For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates.
Foreign Direct Investment
o Types of FDI:
n Joint Venture
n Wholly Owned Enterprises
p Wholly owned subsidiary/ Greenfield Investment
p Merger & Acquisition
Joint Venture
A joint venture is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents.
Exe: New United Motor Manufacturing
Inc. or NUMMI – owned by Toyota and General Motors.
Wholly Owned Enterprises
o In contrast to exporting, licensing and franchising, wholly owned subsidiaries involve a higher degree of risk. Multinational firms have two options:
n Greenfield investment- investment in a completely new facility- , or
n Acquire or Merge with an already established local firm.
Greenfield
o This strategy entails building an entirely new subsidiary in a foreign country from scratch to enable foreign sales and operation.
n Greenfield investment signifies that the parent company has decided to clone its strategy and structure in the foreign plant by transferring its technology, supply chain, organizational structure, and corporate culture.
Greenfield
o Advantages:
· Low risk of technology appropriation
· Able to control operation abroad.
· Provides high experiential knowledge in foreign markets
· Low level conflict between the subsidiary and the parent firm
· Managers of foreign subsidiaries have a strong attachment to the parent firm.
Greenfield
o Disadvantages:
n Could not rely on pre-existing relationship;
n Adds extra capacity to the existing market;
n The firm is seen as a foreign firm by local stakeholders.
n Managers face problems to get accustomed to the local systems
Greenfield
o Risks:
Ø The risk of building relationships with customers, suppliers and government officials in the new country
Ø The risk of recruiting managers and employees familiar with local market conditions
Ø The risk of being seen as a foreign firm by local stakeholders.
Mergers and Acquisitions
o Types of M&As
p Horizontal M&As: involve two competing firms in the same industry
p Vertical M&As : involve a merger between firms in the supply chain.
p Conglomerate M&As: involve a merger of two companies from two unrelated industries.
Mergers and Acquisitions
o Motives
n Strategic motives
n Economic motives
n Personal motives
Mergers and Acquisitions
o Advantages:
n Low risk of technology appropriation
n Increased market power
n Able to control operation abroad.
n Provides high experiential knowledge in foreign markets
n Overcome entry barriers
n Lower risk compared to developing new products
n Increased diversification
n Avoid excessive competition
n Increased speed to market
n Take advantage of pre-existing relationship
n Does not add extra capacity to the market
Mergers and Acquisitions
o Disadvantages:
n Integration difficulties
n Managers might have a weak attachment to parent company
n Very risky method
n Inadequate evaluation of target: Large or extraordinary debt
n Too much diversification
Mergers and Acquisitions
o Risks:
Ø Managers of the acquired foreign subsidiary may not accept the parent company.
Ø Might have a problem of integrating different cultures, structures, procedures and technologies
Entry modes: Risk vs. Control