MANAGING THE

INTERNATIONALIZATION
PROCESS

Objective
After this lecture you should be able to:
Understand why, where, when and how to
enter a foreign country or region
Location decision for FDI
Understand
the
Uppsala
model
of
internationalization.
Understand the different modes of entry
strategies employed by multinational firms.
Understand the de-internationalisation process.

Basic foreign expansion entry

Decisions decisions
A firm contemplating foreign expansion must
make three decisions
Why firms expand in the foreign market
Which markets to enter
When to enter these markets
What is the scale of entry

Chap. 14 Entry Strategy

and Strategic Alliances

3 INTERNATIONAL
BUSINESS

Why???
Companies choose to invest in foreign markets for a
number of reasons, often the same reasons for
expanding their operations within their home
country. The economist John Dunning has identified
four primary reasons for corporate foreign
investments
(Global
Capitalism,
FDI
and
Competitiveness, 2002):

Motives: Market Seeking

Firms may go overseas to find new buyers for their goods
and services.
The top executives or owners of a company may realize that
their product is unique or superior to the competition in foreign
markets and seek to take advantage of this opportunity.
Another motivation for market-seeking occurs when
producers have saturated sales in their home market, or when
they believe investments overseas will bring higher returns
than additional investments at home. This is often the case
with high technology goods. As one analyst noted, The
minimum size of market needed to support technological
development in certain industries is now larger than the
largest national market (Sutherland 1998).

Motives: Resource & Asset Seeking

Resource seeking: a company may find it cheaper to
produce its product in a foreign subsidiary- for the
purpose of selling it either at home or in foreign
markets. The foreign facility may be able to obtain
superior or less costly access to the inputs of
production (land, labor, capital, and natural
resources) than at home.
Strategic asset seeking: Firms may seek to invest in
other companies abroad to help build strategic
assets, such as distribution networks or new
technology. This may involve the establishment of
partnerships with other existing foreign firms that
specialize in certain aspects of production.

Motives: Efficiency Seeking

Efficiency seeking: Multinational companies
may also seek to reorganize their overseas
holdings in response to broader economic
changes. For example, the creation of a new
free trade agreement among a group of
countries may suddenly make a facility located
in one of those countries more competitive,
because of access for the facility to lower tariff
rates within the group. Fluctuations in
exchange rates may also change the profit
calculations of a firm, leading the firm to shift
the allocation of its resources.

Where???

Conditions:
Which

foreign markets

Favorable
Politically stable developed and developing nations
Free market systems
No dramatic upsurge in inflation or private-sector
debt

Unfavorable
Politically unstable developing nations with a mixed
or command economy or where speculative
financial bubbles have led to excess borrowing

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and Strategic Alliances

10 INTERNATIONAL
BUSINESS

FDI Decisions:
Eclectic Paradigm by John Dunning
This paradigm is sometimes called the OLI paradigm.
A firm will engage in FDI when all of the following three
conditions are present:
The firm possesses certain ownership advantages not
possessed by other competing firms
There must be location-specific factors that make it more
profitable for the firm to exploit its assets in foreign, rather
than in domestic, location => Location Advantages
The ownership advantages must be most suitably
exploited by the firm itself rather than by selling or leasing
them other firms => Internalization Advantages

Internalization Theory
Firms still undertake FDI because there are other factors
involved:
Transportation costs
Trade barriers/government intervention
Opportunistic behavior of firms
Tight control needed for strategic reasons
These are called Market Imperfections Due to the
existence of Market Imperfections, firms would like to
internalize instead of entering the market (arm-length
transactions) indirectly

When???

Timing of entry

Advantages in early market entry:

First-mover advantage.
Build sales volume.
Move down experience curve and achieve cost
advantage.
Create switching costs.
Disadvantages:
First mover disadvantage - pioneering costs.
Changes in government policy.

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and Strategic Alliances

13 INTERNATIONAL
BUSINESS

Choosing a Mode of Entry

Having decided which markets to enter,
the firm is now faced with another
decision:
how it should enter?
which mode of entry should it use?

How???

Scale of entry

Large scale entry

Strategic Commitments - a decision that has
a long-term impact and is difficult to reverse.
May cause rivals to rethink market entry.
May lead to indigenous competitive response.

Small scale entry:

Time to learn about market.
Reduces exposure risk.

Chap. 14 Entry Strategy

and Strategic Alliances

15 INTERNATIONAL
BUSINESS

Entry Mode
Entry Modes are specific forms or ways of
entering a target country to achieve the strategic
goals related to presence in that country.

These can be trade related, transfer related, and

foreign direct investment related.

Internationalisation Process: Uppsala Model

Stage 1) no regular export activities;
Stage 2) export activities via independent
representatives or agents;
Stage 3) the establishment of an
overseas subsidiary;
Stage 4) overseas production and
manufacturing units.

Exhibit 6.2 : The Uppsala Model

Market
Knowledge

Leads
to

Market
Commitment
Market
Knowledge

Leads
to more

Market
Commitment

AND SO ON

Leads to
more

The Born Global Firm

A Born Global (BG) firm represents a

relatively new breed of the SME that
undertakes early and substantial
internationalization.
Primarily a niche player, born global display
high degree of entrepreneurial orientation,
proactiveness, and customer service.
In the contemporary era, born global
makes up the fastest growing segment of
exporters in most countries.

Examples of Born Global Companies

History and Heraldry, a born global in England that
specializes in gifts for history buffs and those with English
ancestry- It recently opened a North American subsidiary in
Florida.
QualComm, founded in California in 1985, initially
developed and launched the e-mail software, Eudora, the
firm eventually grew to become a major MNE on the
strength of substantial international sales. Technological
prowess and managerial vision were strong factors in
making the firm an international success.
Born globals are typically avid users of the Internet and
modern communications technologies, which further
facilitate early and efficient international operations.
The emergence of born globals is associated with
international entrepreneurship -- innovative smaller firms
increasingly pursue business opportunities everywhere,
regardless of national borders.

Common Characteristics of Born Global

Firms
Experience early, rapid, and substantial
internationalization
Fewer financial and other resources than
traditional exporters
Formed by technically inclined, marketoriented business people with
entrepreneurial drive
Often enjoy internationally recognized
technical eminence and universal appeal in
given product category

Common Characteristics of Born Global

Firms
Emergence often associated with significant
product/process breakthrough or innovation
Products often involve advanced technology,
substantial added value, superior quality, and
differentiated design
Internationalization typically via exporting and
facilitated through network relationships
Heavy user of advanced IT and communications
technologies

Marketing Strategy

Typically a specialist, niche player

Distinctive product/offering

High degree of product/service quality

Personal attention to building customer

relationships

Constant effort to upgrade foreign

distributor effectiveness

Entry Modes Strategies

Export
Turn Key Projects
Licensing
International Franchising
Joint Venture
Wholly-Owned Ventures
The Greenfield Strategy
Mergers and Acquisitions (M&As)