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IBS Session 3: Explaining Firm Internationalization The Meaning of Internationalization - Expansion of operating horizon beyond borders of home country

- Access to customers and factors of production otherwise not available - Competitive conditions and rivals different to domestic ones - Development of capabilities and competencies otherwise not developed Internationalization makes companies stronger, not just bigger - Change in mindset: broader and more open perspective - See other countries and companies - Improve competitiveness: get rid of inferiority complex What makes international strategy different? - Learn to operate in multiple environments o Consumer preferences, distribution channels, legal frameworks, cultural characteristics, financial infrastructures - Additional political demands and risks o Compensate by complementing corporate strategy with host country industrial development policies o Potential for conflict - Currency fluctuation risks o Economic performance measured in multiple currencies o Accounting and economic exposure - Global competitive game o Access to multiple markets and scale economies enable new strategic options - Increased organizational complexity and diversity o Distance, time, language, culture The Five Basic Questions of Internationalization 1. Why do firms go abroad? a. Motivations Proactive Motives Profit/margin advantage Unique products Technological advantage Exclusive information Economies of scale Tax benefits Reactive Motives Competitive pressures, entry of foreign MNs Declining domestic sales/profits Excess capacity Saturated domestic markets Need to follow customers

b. Goals i. Market seeking - Revenue growth, geographical risk diversification, economies of scale ii. Resource seeking - Scarce natural resources iii. Efficiency seeking

Cost arbitrage, establishment of global supply and manufacturing chains iv. Strategic asset seeking - Technology, brands and trademarks, access to customers 2. What products and value-adding activities? a. Product selection for initial internationalization i. There is always some degree of required adaptation. It is at least necessary to learn/develop capabilities about the market, managing people in other locations and managing foreign subsidiaries ii. Expected benefits of globalization tend to be higher when growth is mandatory, MES is superior to volume of just one country, when requirements of adaptation might generate important knowledge, customers globalize, competitors globalize. 3. Where do firms go? (Host country choices) a. Country-market analysis i. Allows managers to understand market potential (attractiveness), (differential) costs of doing business there, risks associated with being present there. b. Knowledge needed about host country/market i. Physical and human geography ii. Market segmentation iii. Competitors, pricing policies, costs iv. Suppliers, distributors, availability of talent v. Logistics (transportation, customs, ) vi. Quality of communications and energy infrastructures vii. Legislation (Sector specific, corporate, taxation) viii. Business language & culture c. Is there a market for our products? i. Same language doesnt equate same taste (Spain & LatAm) ii. Differences in intra-country regional developments (different tastes & preferences) iii. Different demographic pyramid iv. Varying product specifications (technical standards, packaging, ) v. Competitive advantage in chosen country? vi. Stages of market: early, consolidation, ? vii. Market growth and prospects d. Framework for market selection i. The strategic importance of the market depends on market potential and learning potential ii. The ability of the company to exploit the market depends on barriers to entry:

regulatory restrictions to trade or investment, geographic, cultural and linguistic distance, rivalry in the market. 4. How do firms enter a foreign market? (Entry mode choices) a. Internationalization stages: international Expansion and local adaptation o Core business strategy developed at home country o International expansion (country & entry mode selection) o Adapting the core strategy to the local context b. The RAT test i. Internationalization only represents an opportunity for firms who possesses unique capabilities that can be exploited internationally, and are Relevant, Transferable and Appropriable c. Common difficulties in exploiting advantages abroad Cause of difficulty Loss of advantage Creation of disadvantage Lack of complementary resources Specific to a firm Inability to transfer advantage Disadvantage of transfer Liability of expansion Liability of newness Liability of foreignness Common to a set of firms Inability to create value Government-based or consumerbased disadvantage of foreignness Liability of infrastructure

d. International Entry Modes i. Based on exporting (producing at home) o Indirect exporting, direct exporting, sales subsidiaries ii. Based on FDI (producing abroad) o Greenfield, JV and alliances, M&A iii. Contractual modes (transfer of competitive advantage) o Licensing, franchising, other (management contracts, coproduction agreements, etc.)

5. Which resources?