Definition of terms

Mode of entry in international market

Factors driving internationalisation

Internationalisation process

References

Globalisation , international businesses and internationalisationAccording to the American Defense Institute, globalisation is a “fast and continuous inter-border flow of goods, services, capital (or money), technology, ideas, information, cultures and nations”.

With the help of globalisation, that is, the improved communication network and technology and the “disappearance” of frontiers, enterprises started to move internationally and thus giving rise to international businesses.

International businesses are any commercial transactions which are carried out between firms in countries across national borders. This process of being involved in international operations is known as internationalisation (Welch and Luostarin, 1988, p.35)

Mode of entry into an international countryA mode of entry into an international market is the way an organisation enters a foreign country.

Most literature suggests that there are some key decisions to be taken while entering a new market:

-Barriers to entry, e.g government policy-Market selection-Entry timing (early or late entrant)-Mode of entry selection

1. ExportOldest form of economic transfer and easiest way to enter a market.

Example : Mauritius exports non-industrial diamond to the United States.

Export can be either direct (company exporting directly to the country) or indirect (using a third party)

Less risky mode of entry since the company has control over production of goods and can obtain knowledge of market before exporting

However, for indirect export, the company has less control over distribution

2. licensingcontractual agreement between a licensor and a licensee to use the brand name or patent in exchange of a fees

One example of licensing in Mauritius is Phoenix Beverages which have the licence to make Coca Cola Company products.

less risk and costs associated with licensing since the licensor undertake all research and development of the products.

However the licensee may perform better and become a competitor

3. joint venturesA Joint Venture occurs when two or more people agree to pool their resources in order to share ownership over a company, usually with the aim of making a profit.

In Zimbabwe, Olivine industries have a joint venture agreement with HJ Heinz in food processing.

company has a separate legal identity and the owners share the risks as well as ideas

However, the partners may have conflict of interests and it is impossible to recover the capital invested in the joint venture.

4. Strategic Alliances agreement between two parties who have decided to share their

resources for a specific project

According to a New York Press release of 10th February 2014, Avon and KORRES formed a long-term strategic alliance in Latin America

When a company forms an alliance with a firm in another country, the local firm better understand the market and culture

For example, non-Saudi Arabian companies who want to do business in Saudi Arabia are required by law to have a Saudi Arabian partner which will be beneficial to the foreign one in terms of knowledge.

However, there is a lack of direct control over the project

5. Franchises A franchise involves a licence which the franchisee acquires

from the franchisor in order to sell the latter’s product under its business name

On example of a franchise is Motovac, one of the largest importer and distributor of automotive spare parts, has opened its first franchise shop in Jwaneng in August 2014.

Like exporting, franchising is among the cheapest mode of entry even if there is a cost incurred for creating a unique package for international purposes.

6. Wholly Owned Subsidiary known as a “daughter company” which is completely owned by a parent

or holding company.

large amount of capital and resources required

Example : Volkswagen Group of America, Inc. is a wholly owned subsidiary of Volkswagen AG, one of the world’s leading automobile manufacturers and the largest car producer in Europe

Unlike the other mode of entry, this one is different since the parent company exercise full control and ownership over the subsidiary.

This one is more applicable for the international production theories since the production facility will be set up in the foreign country

Different theories were created to analyse why countries move internationally. Some of them are:

Hymer’s (1960) theory

Vernon (1966) Product life cycle

Buckley and Casson (1976, 1988) internationalisation theory

Dunning (1980, 1988, 1993) Eclectic Paradigm

Transaction cost theory

Hymer’s theory (1960)

Hymer’s (1960) theory: originIn 1960, Stephen Hymer worked on a doctoral dissertation namely, “The International Operations of National Firms: A study of Foreign Direct Investment”

He was the first one to differentiate between portfolio and direct investment which was defined as same in the classical theories.

However, his work was published in 1976 with the help of his supervisor, Charles Kindleberger

Hymer’s (1960) theory: methodologyAnalyse the statistics concerning the movement of capital for the two investments in Canada, Europe, Latin America and other countries

developed his model based on oligopoly firms operating in the planned economy in which he was living

These companies’ objectives were to preserve the monopolistic advantages that they had in their home country.

Hymer’s (1960) theory: Reasons for foreign direct investment Hymer (1976) argues that foreign direct investment is an efficient strategy which is used by firms in order to maximise profits especially when the firm has some technological advantages or intangible assets.

However, two conditions are required for foreign direct investment to take place:-presence of market imperfection -ownership advantages.

Hymer’s (1960) theory: Reasons for foreign direct investment Two major reasons and one minor

1.‘removal of conflicts or competition’ in foreign markets

2.manipulation of ownership advantages of firms

3.risk diversification

Hymer’s (1960) theory: the 21st centuryAfter publishing his dissertation, Hymer decided to write more papers.

This proves that his thought was evolving and he adapted his theories based on different circumstances.

This also means that some of his ideas need to be revisited for others to use it in this 21st century

Vernon and

the product life cycle

Vernon and the product life cycle: origin

According to Posner (1961) Raymond Vernon’s theory (1966) is based on the product life cycle which originates from Kuznets (1953) and the technological gap theory of trade.

His theory was constructed from the fact that most new products which were sold in the United States were produced in the United States itself and it was not worth to settle in other countries due to low demand until it started to rise.

Explanation of model

Source: Adapted from R. Vernon

and L. T. Wells, The Economic Environment

of International Business,4th edition, 1986

Vernon and the product life cycle: explanation of model

Stage 1: The product is first produced and consumed at home and then exported to other high income countries.

 Stage 2: When the product reaches a maturity stage, the mode of production is changed into a foreign direct investment.

Stage 3: There is an imitation process of the product which is developed by the competitors. The firm needs to cut cost and finally has to shift to other developed countries and developing countries.

Vernon and the product life cycle: criticisms and revision of model

His model was based on the United States but new products were not created in that part of the world only

Cantwell (1995) added that the theory cannot be used to explain the innovation activities taken by a firm and considers the model to be product-focus.

In 1973, Frederick Knickerbocker, one of the students of Vernon revisited the model, including an explanation for alarge amount of firm opting for foreign direct investment.

Buckley and Casson (1976, 1988) internationalisation theory

Buckley and Casson (1976, 1988) internationalisation theory: foundation of the model

used Ronald Coase’s (1937) theory of transaction cost

analysis was based on Multinational Enterprises.

believed that producing in foreign countries is more efficient since transaction costs are saved and the knowledge obtained from research and development activities is preserved in the firm.

Buckley and Casson (1976, 1988) internationalisation theory: Reasons for internalisation decision

industry-specific factorslocation-specific factorsfirm-specific factorshigh transportation cost or trade barriers in foreign countriesinadequate information on the foreign marketto maximise profitseasiness to reach buyers and form a relationship with them

Dunning (1980, 1988, 1993)

Eclectic Paradigm

Dunning (1980, 1988, 1993) Eclectic Paradigm: root of modelDunning was working on international business research since the 1950’s before he developed his Eclectic model in 1977

model was renamed from ‘Eclectic theory’ to ‘Eclectic paradigm’ due to its limitations and it is also known as the OLI Paradigm

Dunning (1979) believes that the theory of Hymer, Vernon and the internationalisation theory was insufficient to explain the international production theory,

This is the reason why he combined the knowledge of the three models as well as other models to create his own theory

Dunning (1980, 1988, 1993) Eclectic Paradigm: The components of the model

This theory answers the questions below: why certain firms are in a favourite position for investing abroad;

where would production be located; and

when direct production is preferred over other mode of entry such as exports or licensing.

Dunning (1980, 1988, 1993) Eclectic Paradigm: The components of the model

According to Dunning (1980) production of a firm in a foreign country depends on three conditions

Ownership advantage (O)Location advantage (L)Internationalisation advantage (I)

Dunning (1980, 1988, 1993) Eclectic Paradigm: The components of the modelOwnership advantages can be divided into asset advantages (assets of the company) and transactional advantages (ability to lower transactional cost compare to other firms while using the same resources).

The firm should own tangible and intangible assets as well as skills so that it can compete with the domestic firms of the host country

Example: property rights and intangible assets (like product innovations); advantages of common governance (specialisation)

Dunning (1980, 1988, 1993) Eclectic Paradigm: The components of the modelLocational advantagesCompany can earn more profits if it uses advantages available in the foreign country, like cheap labour, proximity to customers

The country specific advantages that influence the location in which the company will invest can be grouped into the economic (quantity and quality of the factors of production), social (psychic distance between the home country and the host country; culture and language) and political advantages (government policies and tax exemptions)

Dunning (1980, 1988, 1993) Eclectic Paradigm: The components of the modelInternalisation advantageshelp a firm to exploit the gains that it obtain from its ownership advantage and therefore overcome market imperfections (Dunning, 1996)

They also help the company to transfer its ownership advantages across borders (Dunning, 1988).

Examples: exploitation of government intervention like quotas, tariffs, price controls and tax differences; to control supplies and conditions of sale of inputs

Transaction cost theory

Transaction cost theory: originThe idea of ‘transactions form the basis of an economic thinking’ was first thought by an institutional economist, John R. Commons (1931).

Transaction cost theory was later developed by Ronald Coase in 1937.

model answers the question “what ownership structure does the firm want?”

Transaction cost theory: description of Transaction cost and development of modelCoase describes in his article “The Problem of Social Cost” transaction costs as:

Search and information costsBargaining and decision costsPolicing and enforcement costs

The model was further popularised by Oliver E. Williamson

According to Williamson, the determinants of transaction costs are frequency, specificity, uncertainty, limited rationality, and opportunistic behaviour.

This process includes a series of stages undertaken by firms to move internationally. The models developed are:

Johanson and Valhne (1977, 1980) Uppsala internationalisation process model

Johanson and Mattson (1988) Network theory

Johanson and Valhne Uppsala model (2009)

Johanson and Vahlne (1977, 1980) Uppsala

internationalisation process model

Picture: Jan-Erik Vahlne

Johanson and Vahlne (1977, 1980) Uppsala internationalisation process model The Uppsala school was developed by the Scandinavian researchers Johanson, Wiedersheim-Paul and Vahlne in 1975

Johanson and Wiedersheim-Paul studied four Swedish multinationals and the changes in their growth pattern were described as the internationalisation process.

Later on, Johanson and Vahlne (1977) revised this model and recognised that companies use an incremental step to access the international market by using the knowledge from international markets.

Their theory also put emphasis on four aspects that firms should face while going abroad.

Johanson and Vahlne (1977, 1980) Uppsala internationalisation process model These four aspects can be classified as:state (market knowledge and market commitment) and

- state aspects have an impact on the firm’s opportunities and risks.

- Market commitment consists of the resources to be used and the degree of participation of the firm whereas Market knowledge, which is gained by the firm, will be used for the decision making purposes.

change aspects (commitment decisions and current activities).

- change aspects are the outcomes of the state aspect. This means that once the knowledge has been gained and the resources to be used are known, the firm can plan and execute the current activities.

Johanson and Vahlne (1977, 1980) Uppsala internationalisation process model: Pros and consForsgren (2002) believes that the concept of learning is well described in this model.

In fact, the model states that if there is a lack of knowledge of foreign markets, it is difficult for the process of internalisation to occur.

However, according to Andersen (1993), there is no clarification about how or why the internalisation process is conducted in this model.

Network Theory

Network TheoryAccording to Mitgwe (2006), Network theorists disapprove the Uppsala-model and believe that firms using modern technology do not go through the incremental stages since they can achieve a faster internalisation.

In this model, Johanson and Mattsson (1988) defined internalisation as an evolutionary process in which network of business relationships are developed in other countries through three stages:oexpansion (finding a new position in a new market as a network), openetration (improve existing position) andointegration (coordinate the different position in the market).

Network Theory According to this theory, the firms compete on a network level, which includes domestic or foreign suppliers and customers.

The position of the firm in the network is based on two elements fromwhich four market positions were developed.

Source:adapted from Johanson andMattsson 1988

Network Theory early starterhas only a few relationships in the foreign market, little knowledge on the foreign market and they have to appoint an agent in the foreign market and use his experience.

lonely categorythe firm’s suppliers, competitors and other cooperative companies do not have access to the international market. Thus, they cannot help the firm to enter the international market.

Network Theory

Late starters firms which enter markets which are already internationalised. However the late starters are disadvantaged since competitors have more knowledge and experience about the market than them.

International among othersboth the market and the firm are highly internationalised. Firms possess knowledge and experience and are connected to international networks.

Network Theory : Advantages and disadvantages of the model

Model explains the process rather than mentioning the presence of international firms

However, for early starters these strategies cannot be achieved and there may be a high cost while entering the foreign market. They may have to use the Uppsala model (Hertz & Mattsson 1994)

Johanson and Vahlne Uppsala model (2009)

revisited their model and integrated the network approach to it because of new technologies.

In this updated model, the business environment is defined as an international network of relations due to the falling of borders between firms and markets.

It also assumes that for a firm to become successful, it has to be part of strong network.

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