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Managing the Internationalization

Process

Chapter-6

Global Strategic Development

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Objectives

Understand the motives for internationalization;

Explain the theories underpinning the internationalization process;

Explain the born global concept; Understand the different modes of entry

strategies employed by multinational firms;

Understand the de-internationalisation process.

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Introduction

Motives for Decision to Internationalize Organizational Factors

Decision making characteristics Firm specific factors

Environmental factors Unsolicited proposal The ‘bandwagon’ effect Attractiveness of the host country

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Organizational Factors

Decision making characteristics: Foreign travel and experience abroad Foreign language proficiency The decision-maker background Personal characteristics

Firm-specific factors: Firm size International appeal

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Environmental Factors

Unsolicited proposal: some unsolicited proposal from foreign governments, distributors, or clients are hard to resist and may stimulate a firm to go international.

The ‘Bandwagon’ effect: following the leader

Attractiveness of the host country: market size, high purchasing power, high demand for industrial and consumer goods.

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Internationalization Process

How firm Internationalize? Johnson & Paul (1975) made two

observations about the way in which firm internationalize-

1. Firms start exporting to neighboring countries, or countries that are comparatively well known or relatively small ‘Psychic distance ’ :Experiential Knowledge.

2. Firms expand their international operation sequentially :Result of Incremental Decisions

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Johnson & Paul (1975) identified four successive stages in the firm’s international expansion:1. No regular export activities;

2. Export export activities via independent representatives or agents;

3. The establishment of an overseas subsidiary;

4. Overseas production and manufacturing

Internationalization Process

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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.

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Uppsala Model

The model proposes that internationalization is a gradual process dependent on experiential knowledge and incremental steps.

Experiential knowledge: knowledge obtained from experience. Better knowledge leads to stronger market commitment.

Incremental steps: expanding operation step by step

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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:

The amount of resource committed: size of investment

Degree of commitment: difficulty of finding & transferring an alternative use for the resources.

Uppsala Model

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Leads to

Leads to more

Market Knowledge

Market Commitment

Market Knowledge

Market Commitment

Uppsala Model

The process of Internationalization: interplay between the development of knowledge about the foreign market and operation on one hand and increasing commitment of resources to foreign market on the other

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Limitations

Does not explain what triggers the first internationalization process.

Does not explain the mechanism by which experiential knowledge of a foreign market affects commitment.

Uppsala model focuses on Country similarity theory, however, Starbucks expanded their operation first in Japan

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Limitations

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.

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Exceptions

Firms that have surplus resources and experience can take larger internationalization steps.

When market conditions are stable and homogeneous, relevant market knowledge can be gained from other sources than experience

When the firm has considerable experience of market with similar condition, it may be possible to generalize this experience to specific market

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Born Global Firm

A Born Global (BG) firm represents a relatively new breed of the SME (Small and Medium-Sized Enterprise) that undertakes early and substantial internationalization.

Primarily a niche player, born global display high degree of entrepreneurial orientation, proactiveness, and customer service.

In the contemporary era, born global make up the fastest growing segment of exporters in most countries.

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Born Global Firm Born global are typically avid users of the

Internet and modern communications technologies, which further facilitate early and efficient international operations.

Though their limited resources prevent them from engaging in FDI, BG’s can excel in exporting, licensing, and franchising. 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.

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.

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Born Global Firm

Characteristics Experience early, rapid, and substantial

internationalization Fewer financial and other resources than

traditional exporters Formed by technically inclined, market-oriented

business people with entrepreneurial drive Often enjoy internationally recognized technical

eminence and universal appeal in given product category

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Born Global Firm

Emergence often associated with significant product/process breakthrough or innovation

Products often involve advanced technology, substantial added value, superior quality, and differentiated design

Internationalization typically via exporting and facilitated through network relationships

Heavy user of advanced IT and communications technologies

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Some will exceed$100 million

Nichelimits

Managetransitionissues early

Createinternationalposition

Begin exportingearly (2 years)

Smalldomesticsales only

Product orprocessdevelopment

Time

Size

CredibilityFinanceExport

FinanceForeign representationExport know-how & skillsMarket information

Innovation… the next product

Born Global Firm

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Dunning’s Eclectic Paradigm

Foreign market entry mode should be a trade-off between Risk and Return.

Dunning’s Eclectic Framework suggests that firms should consider the following three variables while selecting their entry modes- Ownership advantage Location advantage Internalization advantage

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Dunning’s Eclectic Paradigm 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

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

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.

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Entry Mode Strategies

Export

Licensing

Foreign Direct Investment

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Export

The action by the firm to send produced goods and services from the home country to other countries.

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

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Export

Disadvantages: Hard to control operations abroad Provides very small experiential knowledge in foreign

markets.

Risks: When countries experience major political instability:

delays and defaults on payments, exchange transfer blockage, confiscation of property.

No control over cost: land transport to port, shipping cost, insurance, foreign exchange risk.

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Export

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Licensing

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

Licensing does not mean duplicating the product in several countries.

1. Mottner & Johnson, 2000: 171

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Licensing 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

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Disadvantages: Hard to monitor partners in foreign markets High potential for opportunism Hard to enforce agreements Provides a small experiential knowledge in

foreign markets

Licensing

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Risks: Sub-optimal choice Risk of opportunism Quality risks Production risks Payment risks Contract enforcement risk Marketing control risk

Licensing

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Licensing

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International Franchising

Contract based organizational structure for entering new markets.

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.

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.

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International Franchising

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

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International Franchising

Disadvantages: High monitoring cost High potential for opportunism Could damage firms’ reputation and image Does not provide experiential knowledge in

foreign markets

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Risks: Franchisee might not follow the directives of

franchisor. Communicating wrong concept Potential risk of free-ride by franchisee believing

that franchisors efforts are sufficient for the franchise to succeed

Franchisee could try to increase profits by reducing the quality of inputs

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

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International Franchising

International franchising is likely to succeed when certain market conditions exist: The franchisor has been successful

domestically: unique products and/or advantageous operating procedures and systems.

The factors that contributed to domestic success are transferable to foreign locations.

The franchisor has already achieved considerable success in franchising in its domestic market.

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International Franchising

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Foreign Direct Investment

A firm invests directly in production or other facilities, over which it has effective control, in a foreign country.

FDI’s require a business relationship between a parent company and its foreign subsidiary.

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.

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Foreign Direct Investment

Types of FDI: Joint Venture

Wholly Owned Enterprises Wholly owned subsidiary/ Greenfield

Investment Merger & Acquisition

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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 ManufacturingInc. or NUMMI - owned by Toyota and General Motors.

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Wholly Owned Enterprises

In contrast to exporting, licensing and franchising, wholly owned subsidiaries involve a higher degree of risk. Multinational firms have two options: Greenfield investment- investment in a

completely new facility- , or Acquire or Merge with an already

established local firm.

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Greenfield

This strategy entails building an entirely new subsidiary in a foreign country from scratch to enable foreign sales and operation. 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.

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Greenfield

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.

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Greenfield

Disadvantages: Could not rely on pre-existing relationship; Adds extra capacity to the existing market; The firm is seen as a foreign firm by local

stakeholders. Managers face problems to get accustomed

to the local systems

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Risks: The risk of building relationships with

customers, suppliers and government officials in the new country

The risk of recruiting managers and employees familiar with local market conditions

The risk of being seen as a foreign firm by local stakeholders.

Greenfield

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International Merger is a transaction that combines two companies from different countries to establish a new legal entity.

International Acquisition refers to the acquisition of a local firm’s assets by a foreign company. In an acquisition, both local and foreign firms may continue to exist.

Mergers and Acquisitions

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Types of M&AsHorizontal M&As: involve two competing

firms in the same industry Vertical M&As : involve a merger

between firms in the supply chain. Conglomerate M&As: involve a merger

of two companies from two unrelated industries.

Mergers and Acquisitions

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Mergers and Acquisitions

Motives Strategic motives

Economic motives

Personal motives

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Mergers and Acquisitions Advantages:

Low risk of technology appropriation Increased market power Able to control operation abroad. Provides high experiential knowledge in foreign

markets Overcome entry barriers Lower risk compared to developing new products Increased diversification Avoid excessive competition Increased speed to market Take advantage of pre-existing relationship Does not add extra capacity to the market

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Mergers and Acquisitions

Disadvantages: Integration difficulties Managers might have a weak attachment to

parent company Very risky method Inadequate evaluation of target: Large or

extraordinary debt Too much diversification

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Risks: Managers of the acquired foreign subsidiary

may not accept the parent company. Might have a problem of integrating different

cultures, structures, procedures and technologies

Mergers and Acquisitions

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Type of EntryType of Entry CharacteristicsCharacteristics

ExportingExporting High cost, low control

LicensingLicensing Low cost, low risk, little control, low returns

Strategic alliancesStrategic alliances Shared costs, shared resources, shared risks, problems of integration

AcquisitionAcquisition Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations

New wholly owned New wholly owned subsidiarysubsidiary

Complex, often costly, time consuming, high risk, maximum control, potential above-average returns

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Entry modes: Risk vs. Control

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De-internationalisation refers to “any voluntary or forced actions that reduce a company's engagement in or exposure to current cross-border activities." When to exit How to exit

De-internationalization