Internationalization of Firms Notes
Internationalization of Firms
Learning Objectives
Understand the meaning of 'Internationalisation'.
Know the Internationalization Process Model.
Understand the phenomenon of Born Global firms.
Identify the main features of international new ventures and international entrepreneurship.
The Meaning of 'Internationalisation'
Various definitions co-exist.
It tends to be used roughly to describe the outward movement in an individual firm's or larger grouping's international operations.
Here, it is defined as 'the process of increasing involvement in international operations' (Welch and Luostarinen, 1988).
Internationalisation brings great opportunities but also great risks.
The Decision to Internationalise
The decision to internationalise is a strategic decision. Thus:
Involve top management teams.
Cut across organizational functions.
It is big, expensive, hard-to-reverse, and has profound long-term implications for the organization.
Novel, ill-structured, non-routine.
Associated with high levels of uncertainty.
Rational Model of Decision Making
Steps:
Identify the problem.
Establish decision criteria.
Weigh decision criteria.
Generate alternatives.
Evaluate the alternatives.
Choose the best alternative.
Implement the decision.
Evaluate the decision.
Bounded Rationality
Decision-makers usually do not and cannot make choices that conform to the rational model.
In the real world, decisions are made under limited information and cognition.
Decision-makers are intentionally rational but only limitedly so.
They respond to a complex problem by reducing it to a level at which it can be readily understood.
People satisfice - they seek solutions that are satisfactory and sufficient.
Decisions: Two Tasks
Understanding the decision situation.
Adopting the right decision-making style.
Problem: Identifying the Elements of a Decision Situation
What are the actions?
What are the key uncertainties and contingencies?
What are the possible outcomes?
What are the probabilities associated with the contingencies?
Three Challenges in Strategic Decision-Making
Identifying and picturing possible scenarios.
Determining and then responding appropriately to the (usually qualitative) probabilities.
Reasoning back from probable scenarios to what has to be done now to take advantage of or mitigate them.
Anticipating / Creating the Future
Steve Jobs (1955-2011) example
Anticipating / Mitigating
Canon example
Decision Situation - Risk
A situation of risk is one in which decision-makers are able to attach precise numerical probabilities to all the contingencies that will affect the outcome of their actions.
Example: 100 balls, 60 black and 40 red.
The Strategic Planning Approach (with Contingency and Residual Risk)
Diagram illustrating the known solution space and contingency plans.
Decision Situation - Uncertainty
A situation of uncertainty is one in which decision-makers are unable to specify all the contingencies that might affect the outcome of their actions.
Example: Unknown number of different colors.
Unknown Unknowns
Referencing Donald Rumsfeld's quote about known knowns, known unknowns, and unknown unknowns, 2002.
Unknowns and Black Swans
Known Unknown: A hypothetical contingency that the decision-maker registers consciously and regards as having a real possibility of occurring.
Unknown Unknown: A hypothetical contingency that is not in the conscious mind of the decision-maker even as a possibility.
Black Swan: An unknown unknown that has gone on to occur, that is, a contingency that the person who goes on to be surprised by it did not even imagine as a possibility prior to its occurrence.
Strategic Planning and Learning
Diagram illustrating the planning approach with contingency and residual risk versus the iterate and learn approach.
"Good" and "Bad" Decision Makers
Good decision makers: adjust their decision-making style depending on the decision context.
Bad decision makers: regard decision-making as an event that they alone control.
Good decision makers: recognize that decision-making is an ongoing process and manage it effectively.
Back to the Decision to Internationalise
Focal firm: The initiator of an international business transaction that conceives, designs, and produces the offerings intended for consumption by customers worldwide.
Various reasons: external/internal demand, management orientation, network, etc.
Various types: private, state-owned, public … in services or manufacturing business, different sizes.
The Stage Theory of MNE Evolution
Stages:
Domestic Focus
Pre-export Stage
Experimental Involvement
Active Involvement
Committed Involvement
MNEs evolve only after a period of domestic maturation and home market saturation.
Initial internationalization involvement emerges as an innovation in the firm but without much rational analysis or deliberated planning.
MNEs go through a slow, gradual, evolutionary path to internationalization.
Internationalisation Process Model (aka Uppsala Model)
Internationalisation of the firm can be modeled as a process in which the firms gradually increase their international involvement.
Johanson and Vahlne (1977) found that four case studies of Swedish companies had built their presence in foreign markets incrementally: "they often develop their international operations in small steps, rather than by making large foreign production investments at a single point in time".
Internationalization Process Model
"The underlying assumptions of our 1977 [Uppsala] model are uncertainty and bounded rationality" (Johanson & Vahlne, 2009, p. 1412)
"This staged development of firm internationalization is described as an incremental, risk-averse, and reluctant adjustment to changes in a firm or its environment (Johanson and Vahlne, 1977, 1990)" (Oviatt & McDougall, 2005, p. 32)
Internationalisation Process Model
Market knowledge and market commitment influence current activities, which leads to commitment decisions that change the state of market commitment and knowledge.
Market Commitment
Stages:
No regular export activities
Export via independent representatives
Establishment of sales subsidiary
Production or manufacturing
Related to market knowledge.
Psychic Distance
Definition: Factors preventing or disturbing the flows of information between potential or actual suppliers and customers.
Psychic distance is comprised of 'cultural, structural, and language differences' (Nordstrom and Vahlne, 1992)
Companies begin the internationalisation process in countries that are psychically close before venturing to more distant countries.
Entering countries that are psychically close reduces the level of uncertainty firms face in the new market.
Psychically close countries are easier for companies to learn about.
Psychic Distance Paradox
O'Grady and Lane (1996) demonstrate that starting the internationalisation process by entering a country psychically close to home may result in poor performance and possibly, failure.
The psychic distance paradox: familiarity may breed carelessness.
Implications for Managers
It is important to follow an appropriate 'learning process' in making decisions regarding entering new foreign markets
Treat even psychically close markets as foreign markets
Test assumptions and perceptions prior to entry
Correct interpretation is key
Develop the ability to learn
The Challenge from Born-Globals
The slow, gradual internationalisation predicted by the Uppsala model is no longer practical or realistic in today's fast-paced, interconnected economy.
Today many firms, even those that are young or without much experience, take bold steps to internationalise.
Indicative of this trend is the emergence of Born Global companies - young, entrepreneurial firms that take on internationalisation early in their evolution and leapfrog into global markets.
The INVS (Born-Globals) as a Focal Firm
Since the 80s: the emergence of International New Ventures challenged the stage theory.
International New Venture (INV): "a business organization that, from inception, seeks to derive significant competitive advantages from the use of resources and the sale of outputs in multiple countries" (Oviatt and McDougall, 1994, p. 49)
Now make up the fastest-growing segment of exporters in most countries.
Some Characteristics of INVS
Fewer financial and other resources than traditional MNEs
Primarily a niche player
Early, rapid, and substantial internationalization
Often formed by internationally experienced and alert entrepreneurs
Innovative product or service marketed through a strong network
Internationalise via exporting
Heavy use of information and communications technologies
International Entrepreneurship
The interest in new ventures has led to the development of a new research stream: International Entrepreneurship.
International entrepreneurship is the "discovery, enactment, evaluation, and exploitation of opportunities- across national borders-to create future goods and services" (Oviatt and McDougall, 2005: 540)
"International entrepreneurship is a combination of innovative, proactive, and risk-seeking behavior that crosses national borders and is intended to create value in organizations" (Oviatt & McDougall, 2005, p. 539)
International Entrepreneurship
"Through the lens of their personal characteristics (e.g., years of international business experience) and psychological traits (e.g., risk-taking propensity), entrepreneurs observe and interpret the potential of the opportunity, the potential of communication, transportation, and computer technology to enable internationalization, and the degree of threat from competitors" (Oviatt & McDougall, 2005, p. 542)
A Model of Internationalisation Speed
Factors influencing internationalization speed:
Enabling Technology
Entrepreneurial Opportunity
Motivating Competition
These factors are mediated by Entrepreneurial Actor Perceptions and moderated by Knowledge and Network Relationships.
Role of Knowledge (1)
Knowledge is at the core of the Uppsala model, and it has also played an important role in the new venture theory of internationalisation.
Ability to learn about a new country moderates the internationalisation speed of entrepreneurial firms.
In contrast to MNEs, knowledge in the entrepreneurial firm tends to be more individualised to the founder or entrepreneurial firm.
Role of Knowledge (II)
Knowledge intensity is a key source of international competitive advantage for born-globals.
A broader scope of international markets and a more rapid pace of internationalisation
Amplifying effects of knowledge intensity
Role of Networks
Scholars argue that the network approach is a better explanation of the internationalisation process of entrepreneurial firms.
Networks help founders of born-globals to identify international business opportunities, and those networks appear to have more influence on the founders' country choices than did their psychic distance.
The moderating effect of networks on the speed of internationalisation: the strength of network ties; the size of the network and overall density of the network
Learning Advantages of Newness
"as firms get older, they develop learning impediments that hamper their ability to successfully grow in new environments that the relative flexibility of newer firms allows them to rapidly learn the competencies necessary to pursue continued growth in foreign markets" (Autio et al., 2000: 919)
Implications for Entrepreneurs
Be Aware: Be aware of risks and uncertainties in foreign markets.
Develop: Develop international networks in order to exploit and explore international business opportunities.
Leverage: Leverage knowledge endowments to serve international markets.