Internationalization

• beginning in the 1960s, scholars turned their attention to why and how individual firms pursue internationalization
• scholars developed the internationalization process model in the 1970s to describe how companies expand abroad
• according to the internationalization process model, internationalization takes place in incremental stages over a long period
• exporting is the simplest foreign market entry strategy
• foreign direct investment is the most complex entry strategy
• internationalization typically has a slow nature resulting from managers uncertainty and uneasiness about how to proceed
• internationalization process model stages:

  1. domestic focus stage
  2. pre export stage: often comes into this stage bc it receives unsolicited product orders from abroad. management will investigate feasibility of international business
  3. experimental involvement stage
  4. active involvement stage
  5. committed involvement stage: international business is a key part of firm's profit making and value chain
• born global firms are increasing in today's times
• born global firms can generate at least a quarter of their revenues from overseas within the first 3 years
• many tech companies follow born global theory
• some examples of born global firms include Spotify, Uber, Airbnb, and Mojang (Minecraft)
• born global phenomenon has given rise to new academic field, international entrepreneurship
• internationalizing firms gain and sustain competitive advantage through:

  1. FDI based explanations
  2. non FDI based explanations
• one way to illustrate huge volume of FDI is to examine FDI stock
• even smaller economies such as Ireland and the Netherlands are popular destinations for FDI
• both developed and developing economies are major recipients of FDI
• Hong Kong and Singapore receive considerable FDI as important entrepot ports
• United States, Hong Kong, China, United Kingdom, Singapore are high for FDI
• today, rapidly developing economies now account for a huge proportion of global FDI (with the exception of Africa)
• China has greatly increased its FDI investments in recent years
• total outward FDI stock constitutes nearly one third of global GDP
• 3 alternative theories of how firms can uses FDI to gain and sustain competitive advantage:

  1. monopolistic advantage theory: firms must own or control certain resources and capabilities not easily available to competitors
  2. internalization theory: internalizing value chain activities reduces disadvantages of outsourcing, increasing control
  3. Dunning's eclectic paradigm: specifies 3 conditions to explain the extent and pattern of the value chain operations that companies should own abroad
• as Samsung example implies, most important monopolistic advantages are knowledge and skills
• monopolistic advantage theory two conditions:

  1. returns in foreign markets > home markets
  2. returns in foreign markets > existing domestic competitors in foreign market
• monopolistic advantage theory example: Swiss Pharmaceutical Novartis
• internalization theory example: P&G in Japan, Lenovo in China
• John Dunning drew from various theories including comparative advantage, factor proportions, monopolistic advantage, and internalization to develop Dunning's Eclectic paradigm, making it the most comprehensive FDI theory
• Dunning eclectic paradigm three conditions:

  1. ownership specific advantages
  2. location specific advantages
  3. internalization advantages
• ownership specific advantage (Dunnings) example: Alcoa's proprietary technology through R&D activities
• location specific advantage (Dunnings) example: Alcoa's refineries in Brazil
• Dunning's eclectic paradigm example: German MNE Siemans

  • owns factors at locations worldwide
  • leverages knowledge base of employees in 190 countries
  • internalizes value chain such as lighting, medical equipment, and transportation machinery
• FDI became a popular entry mode with rise of MNE in 1960s and 1970s
• in 1980s firms began to recognize importance of collaborative ventures and flexible entry strategies
• non FDI based explanations:

  1. international collaborative ventures
  2. networks and relational assets
• international collaborative ventures two types:

  1. equity based joint ventures
  2. non equity (project) based strategic alliances
• Starbucks now boasts more than 1,300 coffee shops in Japan through a joint venture with local partner Sazaby League, Ltd
• numerous emerging markets feature family conglomerates: large, highly diversified firms with interlinked ownership
• in Japan, a keiretsu is a conglomeration of businesses linked together by cross shareholdings to form complex conglomerate of interlinked associations
• keiretsu example: Sumitomo, comprised of SMBC Bank, Insurance, Realty and Development Company, Chemical Company, Trading Company, Electric Industries, Heavy Industries, Mazda Motor Corporation, and others
• the International Marketing and Purchasing research consortium in Europe has driven much theory development on networks