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Licensed under a CC BY-SA license International Entrepreneurship Module 1 Internationalization Theories Winter 2012 Senthil Mukundakumar [email protected] Technology & Innovation Management Supervisor: Steven Muegge
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Page 1: Internationalization Strategy Relationships

Licensed under a CC BY-SA license

International Entrepreneurship

Module 1 – Internationalization Theories

Winter 2012

Senthil Mukundakumar

[email protected]

Technology & Innovation Management

Supervisor: Steven Muegge

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Licensed under a CC BY-SA license [email protected] Slide 2

Objectives

Upon completion of the module, you will know about

• Theories on Internationalization process

• Advantages of applying each theory

• Factors influencing early internationalization

and you will be able to

• Distinguish which theory applicable for the firm

• Understand entrepreneur and firm needs for Internationalization

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Agenda

1. Internationalization introduction

2. Internationalization theories

3. Comparison of theories

4. Factors determine internationalization

5. Key lessons

6. Key concepts

7. Questions

8. References

[email protected]

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1. Introduction - Internationalization

“Internationalization focuses on the firm’s core competences

and opportunities in the foreign environment” – Penrose (1959)

“the process in which firms increase their involvements in

international operations” – Welch & Luostarinen (1988)

“the process of adapting firms operations (strategy, structure,

resource, etc.) to international environments” – Calof & Bemish

(1995)

Opportunity Commitment Adaptation

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Pros and Cons of Internationalization

Pros Cons

Increasing the annual net profit or cash

flows by transferring competitive

advantages to a foreign market

High initial investments are necessary, for

example, for a distribution system

Using foreign sales potentials to achieve

volume effects by increasing the quantity

Costly product diversification due to, for

example, technological differences or a

different structure of demand can be a

prerequisite for a successful foreign market

cultivation

Improving performance and especially the

capacity for innovation by means of learning

effects in the foreign market

Less favorable competitive structures on the

foreign market include the risk of, for

example, a price war with local companies

Risk diversification by means of cyclically

diverging developments in markets that

need to be cultivated

Intercultural differences include the risk of

inefficiencies when establishing a business

abroad

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2. Internationalization theories

Process theory (Johanson & Vahlne,

1977, 1990)

Internationalization Theories

Network theory (Johanson & Mattson,

1988)

International entrepreneurship theory

(Oviatt & McDougall, 1994)

Eclectic/Economic theory (Williamson, 1975;

Dunning, 1979)

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Internationalization process theory

• Most well-known as Uppsala model or stage model

• Considers internationalization as an incremental process

of acquisition, integration and use of knowledge on

foreign markets

• Direction of the incremental internationalization process:

establishment chain (no exports, exports with the help of

independent representatives, building one’s own sales

office, on-site production) and psychic distance

(cultivation of countries with lower psychic distance and

gradual expansion)

Slide 7 [email protected]

No exporting Exporting via

agent Joint venture

Wholly owned

subsidiary

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Internationalization process theory

Slide 8

Gradual Internationalization

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Internationalization process theory

State and change aspect

• The theory focuses on four aspects that firms should face

while going abroad: market knowledge and commitment,

and commitment decisions and current activities which

are divided into stage and change aspects that interact

with each other in what seems to be a cycle.

Slide 9 [email protected]

Market knowledge

State Change

Market commitment

Current activities

Commitment decision

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Internationalization process theory

State and change aspect

• State aspects are the resources committed to the foreign

market: market knowledge and commitment decisions that

would affect the firm’s opportunities and risks.

• Market commitment stands for those resources that will be

committed as well as the degree of involvement. Market

knowledge helps the managerial team to make decisions.

• There are two main types of knowledge:

• objective knowledge: which can be transferred from

one market to another

• experiential knowledge: which is gained by

experience, learning by doing or acting.

Slide 10 [email protected]

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Internationalization process theory

State and change aspect

• Change aspects are the results of the state aspects. Once

the firm know about the market they can decide the way the

firm will commit to that market, and will therefore be able to

plan and execute the current activities needed to complete

the cycle by committing to the market.

• The basic assumption of the Uppsala Model is that market

knowledge and market commitment affects both the

commitment decisions and the way current decisions are

performed and this, in turn, changes market knowledge and

commitment. The amount of knowledge of foreign markets

and operations is influenced by the amount of commitments

of resources in foreign markets, and vice versa.

Slide 11 [email protected]

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Internationalization process theory

Critics of Uppsala process model

• The model is too deterministic

• Does not take into account interdependencies between

different country markets

• Not valid for service industries

• Not valid in situations of highly internationalized firms and

industries

• The world has become more homogeneous: psychic

distance has decreased therefore the firms willing to

enter into large markets

• Reduce uncertainty: buy knowledge about legal and

financial standards from international consulting firm

• Firms today has easier access to knowledge ex throw

information technologies Slide 12 [email protected]

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Network theory

• A network is a set of two or more connected business

relationships, in which each exchange relation is between business

firms that are conceptualized as collective actors. (Emerson, 1981) .

• Networking is seen as a source of market information and

knowledge, which are often acquire in longer terms when there are

no relationships with the host country. Therefore, networks are a

bridging mechanism that allow for rapid internationalization

(Johansson & Mattson, 1988).

• The emphasis of the network approach is in bringing the involved

parties closer by using the information that the firm acquires by

establishing close relationships with customers, suppliers, the

industry, distributors, regulatory and public agencies as well as

other market actors. Relationships are based on mutual trust,

knowledge and commitment towards each other.

Slide 13 [email protected]

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Network theory

• The ties resulted from the firm’s network, are hard to imitate.

These ties have consequences in three dimensions: a) the

information is available to the parties involved in the relationship;

b) timing, and c) referrals.

• Firms learn from the ties made in the network, information about

what is going on in the market is open to the network itself. Thus,

there is information that is not available for everyone.

• Ties influence on timing when some information reaches a

particular firm. And referrals firms get interested on other firms, in

the right time and place. Ties may be strong or weak. The

strength of ties is determined by the combination of time,

emotional intensity, intimacy and the reciprocal services of the

ties.

Slide 14 [email protected]

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Network perspective

• The first step a firm must follow in order to internationalize

is the understanding of the market where it operates, its

environmental conditions and the firm’s relationships. Firm

will internationalize, only when the number and strength of

relationships brought up in the network increases, helping

their international extension. By using trust and increasing

commitment in established foreign networks, the firm gains

penetration.

Slide 15 [email protected]

International extension

Penetration International integration

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Network perspective

• After gaining penetration, firms can gain international

integration by using the network and getting involved with

other firms in various countries. Using these steps

relationships are formed, gaining the access to the market

and its resources. Resources can be controlled by the firm

itself as well as other actors involved in the network

depending on the position in the network.

Slide 16 [email protected]

International extension

Penetration International integration

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Eclectic paradigm Economic theory

It is also termed as OIL theory (Organization or Ownership-

Internalization-Location). The core content of this theory is

that the firm to be engaged in is decided on the ownership

advantages, internal advantages, and location advantages of

three joint decisions. The theory states the following

• If firm only has ownership advantages, then, the enterprise

should choose licensing arrangements means of technology

transfer.

• If firm has ownership advantages and internalization

advantages, it should select domestic production and exports.

• If firm has the ownership, the internal, and location

advantages of the three at the same time, the enterprise will

choose foreign direct investment.

Slide 17 [email protected]

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Eclectic paradigm Economic theory

Slide 18 [email protected]

Ownership advantages • Tangible assets • Patents and designs • Organizational efficiencies

Location advantages • Low cost labour • Low cost raw material • Government incentives

to FDIs

Internalization advantages • Reduce in transaction cost • Control over operations • Avoidance of tariff's and

other barriers

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Eclectic paradigm Economic theory

Organization (Ownership) advantages

• It is the capabilities for businesses to meet their current or

potential customers demand. Ownership, firm specific

advantage, includes Patent and Trade Market, Technology,

Name recognition, Core competency of a firm i.e., an ability

meeting with the current/potential customers’ demand.

• If having the ownership advantages, the enterprise should

choose licensing arrangements way to proceed the

technology transfer over other forms of entry. The licensing

specific advantages such as knowledge-based software,

patent items or intellectual properties.

Slide 19 [email protected]

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Eclectic paradigm Economic theory

Internalization advantages

• Internalization is about decision to make an activity internal

to the firm, there’s got to be an advantage of internalized.

Internalization comes about from market imperfections.

Firms having the ownership advantages of intangible

assets, through the expansion of their own organizations

and business/management activities and the use of

internalizing these advantages, will obtain more than non-

equity transfer potential or real profits.

• Firms with the ownership and internal of the competitive

advantages do not necessarily have to choose foreign

direct investment. They can also choose to expand

domestic scale, and then exports to be fully rewarded.

Slide 20 [email protected]

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Eclectic paradigm Economic theory

Location advantages

It is external advantages to the firm. It is not owned by

enterprises but by the host country; therefore, enterprises can

not control discretionally, but adjust and take this advantage.

It is mainly characteristic in three aspects:

• Immovable factor and endowment of the host country, such

as natural resources, convenient geographical location, a

large of population

• host country's political system, policies and regulations with

flexible, concessive, and other favorable conditions (i.e., free

tariff barriers)

• Formation of good infrastructure and gathered economy.

Slide 21 [email protected]

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Eclectic paradigm Economic theory

Location advantages

Location factors directly affect foreign direct investment of

MNEs on the decision on the location and the international

production system layout, a fully foreign direct investment

rather than necessity.

Meeting with the following three advantages, firms will have

global oligopolies:

• Strategic advantage which allows it to compete effectively with

domestic firms.

• Select countries for investment which have attractive sourcing

and/or marketing environments.

• Managerial ability to coordinate operations located in foreign

countries at a cost that is less than the benefit received from

operating in these locations.

Slide 22 [email protected]

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International Entrepreneurship theory

• “International entrepreneurship is defined in this study as the development of international new ventures or start-ups that, from their inception, engage in international business, thus viewing their operating domain as international from the initial stages of the firm's operation.” - McDougall (1989)

• “The study of the nature and consequences of a firm's risk-taking behavior as it ventures into international markets.” - Zahra (1993)

• "A combination of innovative, proactive, and risk-seeking behavior that crosses or is compared across national borders and is intended to create value in business organizations." They note that firm size and age are defining characteristics here. But they exclude nonprofit and governmental agencies.” - McDougall and Oviatt (2000)

• “Examination of how, by whom, and with what effects opportunities to create future goods and services are discovered, evaluated, and exploited” – Shane and Venkataraman (2000)

• “IE is the discovery, enactment, evaluation and exploitation of opportunities across national borders to create goods and services” – Oviatt and McDougall (2005)

Slide 23 [email protected]

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International Entrepreneurship theory

• International entrepreneurship theory also termed as

International new venture (INV) theory

• International New Ventures (INVs) think about

internationalization from the point of inception or they

internationalize right from or shortly after inception

• International New Venture: „a young entrepreneurial firm

that is virtually engaged in international business right

from inception“ (Oviatt & McDougall, 1994)

• This phenomenon contradicts the classic

internationalization theories. Oviatt/McDougall (1994)

develop a frame of reference that explains this

phenomenon.

Slide 24 [email protected]

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International new venture

Slide 25 [email protected]

Instant Internationalization

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International Entrepreneurship theory

By means of the integration of international business,

entrepreneurship and international management theory,

Oviatt & McDougall (1994) develop a model that is based

on four necessary and sufficient factors for the existence of

International New Ventures:

• Organizational formation through internalization of some

transactions (an organization must own some assets, else it will

have nothing to of value to exchange)

• Strong reliance on alternative governance structures (e.g.

Networks)

• Establishment of foreign location advantages (private knowledge)

• Control over unique resources (patents, copyrights)

Slide 26 [email protected]

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International Entrepreneurship theory

IET focus on entrepreneur

• Individual and entrepreneurial behaviour is the basis of

foreign market entry.

• Entrepreneur possesses the skills and enough information

to measure the opportunities in the market with ability to

create and make stable relationships with other firms,

suppliers, customers, government and media.

• The entrepreneur needs to be opportunity seeking and

internationally experienced in order to exploit the

opportunities he might see in the market and be able to

commit to it through entrepreneurial activities that would

be translated as entrepreneurial services.

Slide 27 [email protected]

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3. Comparison of Internationalization theory

Uppsala view Eclectic view Network view IE view

A process of

gradual

international

involvement with

developing market

knowledge and

commitment of

resources.

The extent, form and

pattern of

international

production was

determined by three

advantages:

ownership (O),

location

(L), Internalization

(I).

Internationalization

is the exploitation

of network

advantage.

Relationship of a

firm can be used

as bridges to other

networks.

Proactive

internationalization

process and

consider

entrepreneurial

behaviour and

activities in

bringing new

opportunities.

Slide 28 [email protected]

Main theme and Unit of analysis

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Comparison of Internationalization theory

Uppsala view Eclectic view Network view IE view

Stages mode:

progression from

regular exporting,

exporting via

partners to

overseas

manufacturing.

Start with low

Psychic distance

to higher.

The more O

advantage the higher

propensity to

internalize the O

advantage and the

more attractive a

foreign country as a

production location,

hence the greater L

advantage determine

the entry mode.

Establishment of

relationship in

country network

and development

of those

relationships in

those network

(penetrate).

Connect those

network in

different

countries.

Entrepreneur with

more prior

experiential

knowledge of

international

market will identify

enact and take

entrepreneurial

activities through

the firm.

Slide 29 [email protected]

Method of Internationalization

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Comparison of Internationalization theory

Uppsala view Eclectic view Network view IE view

Emphasis on

importance of

learning process in

internationalization

High explanatory

value for global

firms and provides

string logic for

internationalization

Focus on the

dynamics and

evolution of

internationalization

rather than just

motives or patterns

Not only focus on

firm alone, gives

more importance to

entrepreneurs and

his activities that

benefits the firm

internationalization

process

Slide 30 [email protected]

Strength

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Internationalization process

Internationalization process of SMEs

Uppsala Model Eclectic theory Network theory IE theory

[email protected] Slide 31

Market knowledge

Psychic distance

Market commitment

Entrepreneurial behaviour/activities

International entrepreneurship

International experience

Local and foreign business relationships

Relationships with customers suppliers competitors

Ownership

Internalization

Location

Decides SME’s Internationalization process

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4. Factors determine Internationalization

Profit

• Organizations internationalize with the motive of increasing

the profits of the company and reduce costs. This objective

of an organization to internationalize can be realized if the

company can access a large market and utilize the

opportunities in the market so that it can benefit form

economies of scale and large scale production.

Saturated home market

• Too many domestic manufacturers makes the domestic

market saturated and too competitive for many companies.

Therefore, companies internationalize to compete in the

foreign market that is less competitive and profitable to

protect the local market operations.

Slide 32 [email protected]

Page 33: Internationalization Strategy Relationships

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Factors determine Internationalization

Opportunity

• Opportunity is country specific and determined by growing

economy. The growth of the economy means that consumers

in the country will have the ability to gain purchasing power

with time and the products of the company will be bought at an

increasing capacity.

Band wagon effect

• This is a situation whereby the company decides to venture

into the global market because its competitors in the industry

or other industries are doing it. Such kind of internationalization

might be good for the company if it uses the opportunity well

and maximizes of the potential available.

Slide 33 [email protected]

Page 34: Internationalization Strategy Relationships

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Factors determine Internationalization

Shifting cost priorities

• The costs of manufacturing are driven by flexibility, quality

of products, responsiveness of customers, required skills

and the control processes. Companies internationalize

because of low costs experienced in other international

markets apart from local market

Complex international and political environment

• Exchange rates are more flexible today than before and

there are no high tariffs charged on imported products thus

influencing a lot of direct foreign investments in other

countries

Slide 34 [email protected]

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5. Key lessons

• Building a relationship is a time consuming, costly and

risky process

• Founders of INVs are individuals who see

opportunities from establishing ventures that operate

across national borders because of the competencies

(networks, knowledge, and background) they have

developed earlier and are unique to them.

• The relatively rapid and disperse involvement in

foreign markets by entrepreneurial hi-tech firms can be

linked to opportunities and constraints emerging from a

network of relationships (both formal and informal).

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5. Key lessons

Characteristics of successful global start-ups are:

• A global vision exists from inception

• managers are internationally experienced

• global entrepreneurs have strong international

business networks

• pre-emptive technology or marketing is exploited

• Unique intangible assets are present

• product or service extensions are closely linked

• the organization is closely coordinated worldwide

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6. Key concepts

• Uppsala theory

• Network theory

• Eclectic theory

• International entrepreneurship theory

• International new venture

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7. Questions

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8. References

Aihei, O. 2009. An integrated framework for understanding the driving forces behind non-sequential process of internationalization among firms. Business Process Management, 15(2):286-316

Dunning, J.H. 1979. Explaining changing patterns of international production in defence of eclectic theory. Oxford bulleting of ecnomics and statistics, 41(4):269-296

Johanson, J & Mattsson, L.G. 1988. Internationalization in industrial systems: A network approach. Croom Helm, London, 194-213.

Johansson, J & Vahlne, J-E. 1977. The Internationalization Process of the Firm-A Model of Knowledge Development and Increasing Foreign Market Commitments. Journal of International Business Studies, 8(1):23-32.

Knight, G.G & Cavusgil, S.T. 1996. The born global firm: A challenge to traditional internationalization theory. Advances in international marketing, 8:11-26.

McDougall, P.P & Oviatt, B.M. 1994. Toward a Theory of International New Ventures. Journal of International Business Studies, 25(1):45-62.

McDougall, P.P & Oviatt, B.M. 2000. International entrepreneurship: The intersection of two research paths. Academy of Management Journal, 43:902–908.

McDougall, P.P & Oviatt, B.M. 2005. Defining international entrepreneurship and modeling the speed of internationalization. Entrepreneurship Theory & Practice, 537-553.

McDougall, P.P, Shane, S & Oviatt, B.M. 1994. Explaining the formation of international new ventures: The limits of theories from international business research. Journal of Business Venturing, 9:469–487.

Tuija.M, Elina. P & Vesa. P. 2011. The development of a high-tech international new venture as a process. Journal of business enterprise development, 18:430-456

Willianson, O. 1979. Transaction cost ecnomics: the governance of contractual relations. Journal of law & ecnomics, 22:, pp. 233-262

Zahra, S.A & George, G. 2002. International Entrepreneurship: The current status of the field and future research agenda

Zahra, S.A, Ireland, R.D. & Hitt, M.A. 2000. International Expansion by New Venture Firms: International Diversity, Mode of Market Entry, Technological Learning, and Performance, Academy of Management Journal, 43(5):925-950.

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