Internationalization of Family Business: Adapting the Dominant Models Louise Kelly

Internationalization of Family Business Examine phenomenon of FB in light of two predominant theories of IB Examine phenomenon of FB in light of two predominant theories of IB –Dunning’s ecletic paradigm –Uppsala model of internationalization

General Theory Explores differences between doing business in a single country and doing business in multiple countries Explores differences between doing business in a single country and doing business in multiple countries Other theories include contingency theory, transaction cost economics & agency theory. Other theories include contingency theory, transaction cost economics & agency theory.

Dunnings Eclectic Paradigm 1988, 1993, , 1993, 1995 Theoretical explanation for the existence of multinational enterprises (MNE) Theoretical explanation for the existence of multinational enterprises (MNE)

Uppsala model of internationalization Johanson and Vahine, 1977 & 1990 Johanson and Vahine, 1977 & 1990 –Proposes a model for explaining how firms develop their international operations

Dunning’s Ecletic Paradigm OLI Model OLI Model Basis for a firm’s ability to succeed in or more foreign markets is based on three factors Basis for a firm’s ability to succeed in or more foreign markets is based on three factors –Organization –Location –Internalization

OLI Model Organization Organization –Characteristics of the organization, such as its strategic advantage, competitive position, size and its history Location Location –The market potential and investment risk inherent in any particular foreign market Internalization Internalization –The ability of the firm to manage non-domestic activities

OLI Model MNE must have some strategic advantage which allows it to compete effectively with domestic firms MNE must have some strategic advantage which allows it to compete effectively with domestic firms Must select countries for investment which have attractive sourcing and/or marketing environments Must select countries for investment which have attractive sourcing and/or marketing environments Must have managerial ability to coordinate operations located in foreign countries at a cost that is less than the benefit received from operating in these locations Must have managerial ability to coordinate operations located in foreign countries at a cost that is less than the benefit received from operating in these locations

OLI Model Firms pursuing international expansion must have some form of advantage in each of these factors to overcome the costs and disadvantages inherent in competing in int’l level and as a non- domestic company in a foreign market Firms pursuing international expansion must have some form of advantage in each of these factors to overcome the costs and disadvantages inherent in competing in int’l level and as a non- domestic company in a foreign market Theoretical basis for the existence of MNEs Theoretical basis for the existence of MNEs

Uppsala Model How firms develop from domestic to international firms How firms develop from domestic to international firms Also know as stages model of internationalization Also know as stages model of internationalization Firms go through two related processes of development Firms go through two related processes of development

Stages 1. increasing stages of sophistication in their international activities 1. increasing stages of sophistication in their international activities 2. increasing levels of psychic distance between the domestic base and international locations of activities 2. increasing levels of psychic distance between the domestic base and international locations of activities

Stages Firms become more competent in their ability to engage in complex international activities over time and with experience Firms become more competent in their ability to engage in complex international activities over time and with experience

Stages 1. No export activities 1. No export activities 2. exporting through independent representatives located in foreign countries 2. exporting through independent representatives located in foreign countries 3. establishment of sales subsidiary in foreign countries 3. establishment of sales subsidiary in foreign countries 4. manufacturing in foreign countries 4. manufacturing in foreign countries

Stages Stages with respect to location of their foreign activities Stages with respect to location of their foreign activities Initiate foreign activities in countries most similar to their home countries Initiate foreign activities in countries most similar to their home countries Psychic distance Psychic distance –Difference between the market structures, cultures and governance of any two countries –Ex: US/Thailand >Thailand/South Korea

FB and IB Theory FB do not necessarily follow OLI Model or Uppsala FB do not necessarily follow OLI Model or Uppsala

Propositions Proposition 1: Family businesses will rely more on family-based characteristics rather than strategic advantages when pursuing international business. Proposition 1: Family businesses will rely more on family-based characteristics rather than strategic advantages when pursuing international business. Proposition 2: The personal interests of family members will be a primary factor in the selection of IB locations by FB Proposition 2: The personal interests of family members will be a primary factor in the selection of IB locations by FB

Proposition Proposition 3: FB will rely more on family- based control mechanisms for managing foreign locations than organizational governance mechanisms. Proposition 3: FB will rely more on family- based control mechanisms for managing foreign locations than organizational governance mechanisms.

Agenda: Action-Centered Strategy model that focuses on what leaders actually have to do to be effective. model that focuses on what leaders actually have to do to be effective. Three main tasks: Three main tasks: 1.Achieving the task, defining strategy 2.Building and maintaining the team 3.Developing alliances