Internationalisation How and why do firms cross border?

A definition ‘Internationalization is the process of “increasing involvement in international operations” (Welch and Luostarinen 1988), where the firm transfers products, services and resources across countries, and is thus required to select which countries to operate in and the mode of operation.’

Two Approaches We will examine two approaches to the internationalisation process (there are others). 1. The stages or incremental approach 2. The resource based view

Stages or incremental approach Probably the most influential of this type of model has been the stages or incremental internationalisation model, or Uppsala model, developed in the mid 1970s by researchers at Uppsala University. (Johanson and Wiedersheim-Paul 1975; Johanson and Vahlne 1990). In this view, the firm internationalises incrementally by increasing its international commitment in prescribed stages

Four stages of the internationalization process 1.no regular export activities 2.export via independent representatives (agents) 3.sales subsidiary 4.production/manufacturing

Process of Internationalization Wholly owned subsidiary Joint venture with a local partner Franchising Control over foreign activities Licensing Export through agent or distributor Indirect Export Amount of resources committed to foreign market

Stages View Moving through the stages depends on the acquisition of the necessary experience and knowledge concerning the foreign market. Hence the importance of learning. Leads to greater commitment in the foreign market and greater risk to the firm. Assumes the process is terminal/irreversible Assumes firm is risk averse Initial focus is on those states with a close psychic distance – explains country selection

Psychic distance Factors preventing or disturbing the flows of information between the firm and the market Influenced by differences between home and host state in terms of Culture Language Political systems Business practice Industrial development Educational systems

Criticisms of Model Overly deterministic A firm’s internationalisation may start at any stage Rise of Born Globals It does not consider the market and economic environment, including government rules and regulations. Ignore role of strategy - this may not be a natural process Hence it oversimplifies a complex process

Resource-based view (RBV) Seeing the firm as a bundle of resources can be traced back to the work of Penrose (1959). She declared that a “firm is more than an administrative unit; it is also a collection of productive resources the disposal of which between different uses and over time is determined by administrative decision.” Edith Penrose (1914-96)

Resource-based view Going back to Penrose - firms attain a unique character by virtue of their heterogeneous resources. This is the basis of the RBV It is the heterogeneity, not homogeneity, of resources that enables one firm to have a competitive advantage over other firms in the same industry or market, enabling the firm to create value and profitability.

Resources A firm’s resources are usually defined as tangible and intangible assets. Tangible could include: machinery, plant staff. Intangible: company reputation, brand names, culture, technological knowledge, accumulated learning and experience.

Sustaining competitive advantage For this to be the case, the firms profit yielding heterogeneous resource, or a close substitute for it, must be difficult to reproduce by rivals. Namely there is imperfect imitability and imperfect substitutability. Some have argued that there must be some isolating mechanism that preserves the resource from imitation, and hence the erosion of profit

Isolating mechanisms They can include: property rights like patents and copyrighted brand names information asymmetries - can be linked to experience, innovation, learning effects reputation economies of scale in specialised assets use of resources based on geographical comparative advantage.

Resource based view: internationalisation The driving force behind internationalisation on the part of the firm is the creation of value through the development, transfer and use of resources in and across countries Thus the firm has to consciously evaluate possible future pathways and select the course of action that meets the value goal This requires a sequence of decisions concerning motivations to internationalise and appropriate modes, and country selection. These can be interlinked

RBV:Motivations for internationalisation These include 1. The firm internationalises to create additional value from using existing resources The resources must therefore be transferable to other countries. The resources, or their application to the manufacture of goods and services, must be valued in the foreign market.

Motivations 2. The firm internationalises to create value through the access and development of resources abroad The resources may be in a ‘better condition’ abroad - such as might be true of location-specific natural resources. - or in case of a strategic asset, efficiency,or brands that would take time and money to develop (Kraft’s acquisition of Cadbury)

Motivations 3. A firm may internationalise to protect the profitability of its resources. This may be because a rival has already internationalised to get greater returns from its resources or gain access to advantageous foreign location resources. By taking into account the actions of competitors, the RBV also recognises the importance of the external environment.

RBV:Modes of internalisation Decisions 1 Selecting the country that enables additional value creation from the firm’s resource set 2 Mode of internationalisation - trade, alliance, purchase - depends on the characteristics of the firm’s existing resources, on their transferability across countries, on the need for better resources, and on the characteristics of the environment, not only competitive but also institutional conditions

RBV The firm therefore does not follow a predetermined set of stages or sequences as in the Uppsala approach; but, from a number of possible paths, it chooses the one that it thinks will create value, sustain competitive advantage and profitability.

Internationalisation is a dynamic process, not a one-off event. In order to continue to create value and sustain competitive advantage, decisions are re-evaluated as the conditions of the competitive and institutional environments of foreign operations and the characteristics of the resources of the firm change In the most extreme case, the firm might sever its link with a country, either by divestment or closure.

References J. Johanson and J-E Vahlne (1990), ‘The mechanism of internationalisation’, International Marketing Review 7: 11-24. Johanson, J. and Weidersheim-Paul, F. (1975) ‘The internationalisation of the firm: four Swedish cases’, Journal of Management Studies, 305-22 . Edith Penrose, The Theory of the Growth of the Firm (1959) Lawrence S. Welch and Reijo K. Luostarinen (1988), ‘Internationalization: Evolution of a Concept’, Journal of General Management 14: 34-55.