International Business

Week 2
Internationalisation
Process

Dr Linda Piusa
Last week

We took an overview of
globalisation and considered the
patterns and trends of increases in
import/export, cross-border mergers
and acquisitions, and foreign direct
investment (FDI).
This week

We will look at how firms are

bringing about globalisation and
consider the process of
internationalisation.
(Chapter 2 of the key text)
Learning Outcomes

Explain the pressures for

internationalisation;

Outline strategies for

internationalisation;

Assess the advantages and

disadvantages of each strategy;
Learning Outcomes

Discuss principles that may contribute

to successful international alliances;

Evaluate the different theoretical

approaches to internationalisation;

Review the barriers that must be

overcome for successful
internationalisation.
Some reasons why firms
internationalise
SUPPLY FACTORS
To reduce production costs
To reduce distribution costs
To be close to natural resources
For access to key technology
For tax advantages
To take advantage of incentive
schemes
Some reasons why firms
internationalise

Economies of Scale
Unit Cost
Economies Diseconomies

Optimum Scale Output

Some reasons why firms
internationalise

Production Costs
RELATIVE UNIT LABOUR COSTS (RULC)

Relative labour costs

_________________________ x Exchange
Rate

Relative labour productivity

Some reasons why firms
internationalise
DEMAND FACTORS
Saturation of home market
Increasing demand from customers
overseas
Market-oriented MNE seeking new
markets
To avoid trade barriers
To match / prevent competitors
The opportunity arises
How firms internationalise

Export based
Indirect exporting
Direct exporting
Non-equity based
Licensing
Franchising
Equity based
Joint ventures
FDI
Risk of Key Market Entry
Strategies
Export-based
internationalisation
INDIRECT EXPORTING
Firm operates through
intermediaries
1. Export house (simplest, but no contact
with market, no real international
learning /experience)
2. Confirming house (acts for buyers and
guarantees payment to seller - direct
contact of buyers and sellers)
3. Buying house (as confirming house but
also finds sellers for the buyer)
Export-based
internationalisation
INDIRECT EXPORTING
Advantages
1. Lower cost in the short term
2. Quicker to start

Disadvantages
1. Less control of costs long term
2. No direct experience of overseas
market
Export-based
internationalisation
DIRECT EXPORTING
Advantages
1. Direct experience of overseas market
2. More control of costs longer term

Disadvantages
1. MUCH higher risk
2. Slower and higher cost to start
Non-equity-based
internationalisation
LICENSING
Permission granted by the owner (eg of a
patent, trademark or copyright) to a
foreign seller to sell goods or service for
a fee and, usually, commission on sales.
Licensor gains fast access to overseas
market with minimal investment and
without having to gain experience of
that market
Licensee gains immediate access to
brand and/or technology
Non-equity-based
internationalisation
FRANCHISING
Franchisee purchases the right to trade under
franchisors brand name.
Advantages for franchisor
fast growth in overseas market financed by
franchisee investment
franchisee has local knowledge
Disadvantages for franchisor
Risks in finding good franchisees
Good franchisees gain enough knowledge to
become direct competitors
Non-equity-based
internationalisation
FRANCHISING
Franchisee purchases the right to trade under
franchisors brand name.
Advantages for franchisee
Safer using existing brand
Support and training from franchisor
Disadvantages for franchisee
High cost up front
Reduced profit (commissions and fees to
franchisor)
Strict control by franchisor reduces freedom
Equity-based
internationalisation
JOINT VENTURES
Create a new identity in which both partners
take an active role in strategy and decision-
making
Advantages
Shared and reduced costs (economies of scale)
Shared and reduced risks
Larger combined entity can be more
competitive
Access to partners learning, processes,
experience
Equity-based
internationalisation
SPECIALISED JOINT VENTURES
Each partner brings a specific and different
competency
Advantages
As with ordinary joint venture
Access to a competency you do not possess
Disadvantage
Partner learns from you and could be a
possible competitor in your specialised
competency.
Equity-based
internationalisation
SHARED VALUE-ADDED JOINT
VENTURES
Here both partners contribute to the same
function of value-added activity.

Example: Fuji-Xerox (share design, production

and marketing functions)

Disadvantages: partners can more easily lose

their competitive advantage; more difficult to
exit due to coordination costs.
So for a successful joint
venture
Careful assessment of prospective
partners
Understanding that
collaboration=competition
Learn from partners
Limit information flow TO partners
Agree clear goals and rules at the start
Give managers sufficient autonomy
Equity-based
internationalisation
ALLIANCES
Difficult to theorise as there are many
different forms, but an alliance is much
less structured than a joint venture or a
merger or acquisition.
Alliances

Jeffrey Reuer (1999) suggests basing the decision on

whether or not to enter into an alliance on the Four Is :

1. Infeasibility (where merger/acquisition is not possible)

2. Information Asymmetry (where one company knows
much more than another company so difficult to carry
out due diligence)
3. Investment in Options (where future prospects are
very uncertain so there is staged engagement and
call options giving rights but not duties to buy)
4. Indigestibility (the costs of merger/acquisition or the
organisation are not easily digestible, so an alternative
strategy is necessary
The Four Is of
Collaboration
Equity based
Internationalisation
CONSORTIA
(cross-industry)
bringing together different companies to pool
resources
some overlap with alliances but consortia
usually involve more firms and cross sectors
MUCH more common in Asia than US or
Europe
Known as keiretsus in Japan; chaebols in
Korea.
Equity based
Internationalisation
Foreign Direct Investment
(fdi)
. . . . in land, buildings,
equipment, an organisation
Advantages: highest level of
control and profit (longer term)
Disadvantages: high initial cost
and highest level of risk
Internationalisation
Theories
Ownershipspecific advantages
Locationspecific advantages
Internalisation
Eclectic theory
Sequential theory
Simultaneous theory
Network theory
International product life cycle (IPLC).
Ownership-specific
advantages
Assets owned by the firm
which deliver a competitive
advantage
Better technology
A well-known brand
Economies of scale
Business skills eg managerial
expertise
Location-specific
advantages
Could answer where? rather than why?

Could be supply factors such as natural

resources, human resources,
infrastructure

Could be demand factors such as

market characteristics (size, segments)
Internalisation
Cost-based decision

Is it cheaper to own a plant overseas than to

contract with a foreign firm via a franchise, license
or supply agreement?

Foreign direct investment is more likely to occur

(i.e. the process to be internalised) when the costs
of negotiating, monitoring and enforcing a contract
with a second firm are very high.
Dunnings Eclectic Theory

Dunning (1993) combined ownership-specific,

location-specific and internalisation into his
eclectic paradigm

His model suggests the combination delivers

greater control of revenue generation.

Dunning suggests that firms will only undertake

fdi when the following conditions are all satisfied :
Dunnings Eclectic Theory :
conditions
The company possesses an ownership-
specific advantage
It is more profitable for the company to
exploit that ownership-specific advantage
in the overseas market than in the home
market, which means there must also be
location-specific advantages
These advantages are better exploited by
the firm itself rather than licensing or
franchising them so the firm internalises
the advantages
Sequential Theory
(Uppsala Model)
In examining the internationalisation of Swedish
firms, Johanson and Widersheim-Paul found that
firms move sequentially through 4 stages :

1.Intermittent exports
2.Exports via agents
3.Overseas sales via knowledge agreements with
local firms, for example by licensing or franchising
4.Foreign direct investment in the overseas
market.
Sequential Theory
(Uppsala Model)
Each stage marks a progressive increase in
commitment of resources and the knowledge
gained makes each subsequent stage easier
because the psychic distance between the
firm and the overseas market is progressively
reduced.

Firms also reduce this psychic distance (and

the perceived risks) by moving first to countries
that are culturally similar.
Simultaneous Theory

As a result of globalisation and consumer tastes

becoming more homogeneous, the need for the
sequential approach is declining and firms can
obtain economies of scale and scope by entering
markets simultaneously rather than in gradual
sequence.
BUT
Critics suggest there is increasing demand from
sophisticated consumers for customisation.
Consequently, simultaneous entry into markets is
not feasible for smaller, less experienced firms.
Network Theory

Internationalisation builds on existing

relationships or creates new
relationships.
The focus changes from organisational
or economic to a more social focus
because it is people who make the
decisions and take the actions.
This approach suggests that some
internationalisation can be explained by
the fact that others within the network
internationalise (to those countries).
International Product Life
Cycle (IPLC)
More detail later (Ch 3) but the suggestion
here is that the stage reached in the IPLC
will affect the pattern and extent of
internationalisation.
Stages in IPLC are :
New product stage (production in innovating
country)
Mature product stage (scale economies reducing)
Standardised product stage
(low-cost locations become feasible outsourcing)
Barriers to
internationalisation
Top barriers to SME access to international
markets (for OECD member economies):
1.Capabilities (lack of HR, management
time, development of new products,
finding customers; quality requirements)
2.Access (limited information about
markets, identifying foreign business
opportunities; unfamiliar exporting
procedures)
3.Finance (shortage of working capital to
finance exports)
Thank you and see you next
week!