Internationalization: challenges for policy and strategy

Internationalization: challenges for policy and strategy

MDRI, June 19, 2013

Ari KokkoDepartment of International Economics and Management

Copenhagen Business School

Outline1. About internationalization and exporters

Why and why is it so difficult?2. Export promotion

What can government do to facilitate internationalization?

3. Internationalization of large firmsA matter of strategy?

4. The secret of successInnovation and entrepreneurship

5. Some examples from Europe

1. Internationalization

• Theory– Motives, explanations, patterns

• Policy– What is a good policy environment for

globalization?• Strategy

– What is required at the firm level?

Drivers of internationalization

Hard to manageoutside

Why internationalize?

• Company– Sales revenue– Scale– Technology– Ìntermediate goods– Resources– Competitiveness

Profitability Survival

• Economy– Employment– Efficiency– Knowledge– Income– Growth

National wealthStandard of living

Barriers to internationalization• Legal and regulatory

– Tariffs– Subsidies– Public procurement– Border controls– Controls on immigration

• Technical– Technical standards– Private standards – Transportation and

distribution

• Culture– Language– Tastes– Norms, values and

behavior– Religion– Work culture– Corruption

• Risk– Competition– Liability of

foreignness

Internationalization is a complex process

Source: Wiedersheim-Paul & Welsch (1980)

Exporters need to be strong to overcome liability of foreignness

The exporters

• Most SMEs do not export– It is difficult and costly to become an exporter

• More sporadic exporters than permanent exporters– Most firms have to try several times before they

succeed• Most exporting companies export one product

variety to one foreign market– A little bit more knowledge and skill needed for every

new export market and every new export product

2. What is needed for export success?

• Large firms– A good domestic

business environment• Macroeconomic stability• Low trade barriers• Competitive exchange rate• Efficient bureaucracy and

reasonable tax rates• Good infrastructure• Flexible labor market• Access to human capital

and technology• Financial resources /

export credit guarantees

• SMEs– Same + support to

overcome barriers to internationalization

• Market information• Links to partners / network

in foreign market• Marketing support /

visibility• Institutions for quality

control and quality standards

• Financial resources

Export promotion: global experiences

• Red light– Protectionism– Export subsidies

• Yellow light– Preferential access to credits and foreign exchange

• Green light– Openness to trade and FDI– Infrastructure and education– Institutions for technology and market research– Quality control and quality standards– Competitive exchange rate

Example: Business SwedenThe Swedish government and the Industry have established Business Sweden to help Swedish private companies develop contacts with customers in other countries

Practical helpAnalyses and advice

Explore the opportunities

•Information & Knowledge

•Local export advisor

• Market selection

Choose strategy

•Market analysis

•Partner search

•Visitors program

•Business opportunity package

•Acquisition support

Establish presence

•Business Support Office

•Forming the company

•Recruitment

Develop the business

•Sales and market support

•Seminars and events

•International procurement

•Development programs initiated by foreign aid organizations and the industry

Business Sweden’s offer to private companies in Sweden

Americas

Africa

Asia & the Middle East

Oceania

Europe

Business Sweden in the world

BotswanaEgyptKenyaMoroccoNigeriaSouth Africa

ArgentinaBrazilChileColombiaCanadaMexicoUSA Australia

New Zeeland

UAEHong KongIndiaIndonesiaIraqJapanKazakhstanChinaMalaysiaSaudi Arabia SingaporeSouth KoreaTaiwanThailandVietnam

BelgiumBulgariaDenmarkEstoniaEUFinlandFranceGreeceItalyLatviaLithuaniaHollandNorwayPolandPortugalRumania

RussiaSwitzerlandSerbiaSpainGreat Britain &IrelandSwedenCzech RepublicTurkeyGermanyUkraineHungaryAustria

Other agencies supporting Swedish exports

Swedish International Development Cooperation Agency

The Swedish Agency for Economic and Regional Growth

Exportkreditnämnden is a business partner to exporting companies and banks

Swedish Export Credit Corporation: Experts in international financing

A channel for investment based on an industrial policy that promotes economic growth

The Swedish Governmental Agency for Innovation Systems

The Swedish Environmental Technology Council

Swedfund is a committed, active and long term investment partner

3. Internationalization of large firms

• Larger scale allows investment in export-specific assets, skills, and knowledge

• Limited dependence on public export promotion structures– Exceptions: export credits, credit guarantees

• Focus on internationalization strategy– To create sustainable competitive advantage leading to

growth and profitability– To get customers to prefer your offer over your competitors’ – To use or create market imperfections

Strategy: Goal and how to get there

Why do we need a strategy? What happens if we do nothing?

What happens without strategy? Second law of thermodynamics

• Entropy, disorganization, randomness and chaos increase (if we do not interfere and create order)!

Rudolf Clausius

Organizations and strategy

Tools

• Market analysis – external as well as internal– Porter’s five forces– SWOT

• Strategic positioning– Balancing pressure for cost reductions against

pressure for local responsiveness

Internal and external fit

22

Strategy

Internal Resources

External Environment

Strength

Weaknesses

Opportunities

Threats

25

Generic strategies

International strategies

• However, textbook models seldom generate blue ocean strategies where you have the whole ocean for yourself

• When others do the same, it makes the oceanred

4. THE SECRET OF SUCCESS

Entrepreneurshipleads to

Fundamental Competition

which operates through

Creative Destructionand creates

Temporary Monopolies

Fundamental competition• Competition from

– A new commodity– A new technology – A new source of supply – A new type of organization– Breaking up cartels or reorganizing an industry

• Competition which commands a decisive cost or quality advantage...

• ... and strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives

Fundamental competition• From local grocery stores to global supermarket

chains (Wal-Mart)

• From local craftsmanship to global do-it yourself in furniture (IKEA)

• From instant photography (Polaroid) and film-based photography (Kodak) to digital photography (Sony, Nokia)

• From mainframes (IBM) to the PC (Compaq) to the powerful mobile phone (Nokia, Sony-Ericsson)?

Innovation: Key strategy even in seemingly simple industries

• Seek opportunities• Dare to try• Challenge the

boundaries

• Listen to and encourage new ideas

• Fight bureaucracy• Act and look for a more

efficient solution• Constant improvement• Fast pace• Curiosity• Open doors• Respect others

Core values of

But innovation is hard…

• Most new ideas are bad ideas

• The Iron Law of Innovation: 10-20-70

67%

21% 12%0%

20%

40%

60%

80%

Belowexpectations

According toexpectations

Strongly aboveexpectations

Success ratios of corporate venturing (sales relative to expectations of venture champion)

N=86

How to promote entrepreneurship and innovation

• Compare yourself with your best competitors– Benchmarking

• Prepare for tomorrow’s challenges already today– Foresight and market analysis

• Invest more in knowledge and skills than what you need today– Create Excess Capacity

How to promote entrepreneurship and innovation

5. Examples from Europe

• Global financial crisis has forced firms to innovate in order to survive

• Three innovation strategiesA. Increased value added from higher efficiency in

existing activities: product / process innovationB. Increased value added from new position in

value chain: functional innovationC. Move to new value chain: inter-chain innovation

Innovation trajectories

Strategy B: upgrading within the value chain• V

alue

add

ed

R&D Design Engineering Manufacturing Operation Marketing Sales Services

Branding

Marketing Center

OperationCenter

Manufacturing Center

R&DCenter

DesignCenter

Example strategy B: AS Kodumaja, Estonia

AS Kodumaja turnover 2004-2011 and forecast 2012

Example strategy C: AS Estiko Plastar (packages for construction materials –> packages for food industry)

Employees

Export

Turnover

• Thank you for your attention!