Lecture 2: Internationalisation

What is Internationalisation? • -

3 aspects: Extension of reach Market penetration Increased co-ordination

4 theories of Internationalisation • • • •

Steps - internationalisation as a sequential process Process Models Contingency models - born globals Network perspective

1. Internationalisation as a sequential process • • -

Based on observations Two basic perspectives Uppsala Model Innovation based models

Criticisms • Deterministic • Too simple • Unidirectional?

2. Process View • See internationalisation as based on learning and knowledge • As undertake so get better at it so expand market reach and penetration • Thus overtime commitment to international markets increase • Initial focus is on those states with a close psychic distance

Process View • Assumes process is terminal/irreversible • Assumes managers are risk averse • This is due to uncertainty over needs, market and transaction.

State and Change Aspects State Aspects

Change Aspects

Market Knowledge

Commitment Decisions

Market Commitment

Current Activities

Knowledge Types and Internationalisation Knowledge Objective

Experiential

Market

Institutional

Internationalisation

Psychic distance •

factors preventing or disturbing the flows of information between the firm and the market • Influenced by differences between home and host state in terms of

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Culture Language Political systems Business practice Industrial development Educational systems

Liability of Foreignness • New entrant face in-built disadvantages vis-a-vis incumbent • Based on ignorance, higher costs etc • Mitigate via differentiation

Criticisms of Process Model • Internationalisation is determined by environment not incremental steps (Turnbull 1987) • Ignore role of strategy this may not be a natural process • Too deterministic • Not explain MNCs

Criticisms of Process Model • Government rules and regulations • Rise of the Born Global (see below) Thus it oversimplifies a complex process.

3. Contingency based views • React to shifts in environment • New knowledge, new skills. • Internationalisation is an uneven and indeterminate process • Born globals, micro-nationals etc.

4. Network View Internationalisation is based on developing networks of business relationships in other countries through: • Extension: investments in networks that are new to the firm. • Penetration means developing positions and increasing resource commitments in networks in which the firm already has positions. • Integration can be understood as the co-ordination of different national networks

Network View • Thus firms internationalise because other firms in their (inter)-national network are doing so. • Internationalisation as a cumulative process in which relationships are continually established, developed, maintained, and dissolved in order to achieve the objectives of the firm.

Network View • Gradual learning and development of market knowledge through interaction within networks • From the network perspective, the internationalisation strategy of a firm can be characterised by the need to 1) minimise the need for knowledge development, 2) minimise the need for adjustment, 3) exploit established network positions

Multinationality-Performance

Performance Stage 1

Stage 2

Stage 3

Internationalisation

International Entrepreneurship

SMEs and International Strategy • SMEs - local market • Increasingly affected by globalization in both a proactive and reactive manner • Need to develop strategy to respond • Offensive/or defensive strategies

Push Forces • Manager/founder characteristics • Economics of operations • Nature of strategy and competition • Economics of RTD, innovation

• Nature of hi-tech products • Clear strategic rationale for international operations

Pull Factors • • • •

Liberalisation Advances in ICTs and Communications Attractiveness of Potential partners Attraction of overseas customers

Internationalization and the Small Business • Two models

1)Small business stage model: process of following incremental stages of internationalization 2)Global start-up: company that begins as a multinational company/ contingency approach

Born Globals • • • • •

Managers have strong global mindsets Takes less than 3 years to go global Have a wider international experience Have a higher risk tolerance Many use networks as a platform for market access

Born Globals (Madsen & Servais 1997)

• International or global approach right from the birth • Large proportion of sales comes from exports • Accelerating internationalization process

– Proactive and innovative strategy – Founder’s motivation and international experience • Specialization and targeting niche markets • Collaboration with partners

Born Globals • Driven by: -domestic and foreign client patronage -targeting niche markets - Industry specific considerations as opposed to psychic distance - Homogenous customers; little product adaptation needed - Technology differentiated products Little attempt to follow a deliberate process.

Born Globals • To succeed BGs need: -MNCs acting as systems integrators -MNCs distributing BG products/services -Networks -Internet Or any combination of the above….

Small Business Global Start-up • Key elements favoring global start-ups

– Dispersed human resources – International sources of venture capital – The existence of a global demand – The lack of a geographically protected market – The necessity of worldwide sales to support the venture – The potential to avoid later resistance to internationalization

Successful SME Global Strategies • Focus on niche • Have to take on MNCs by developing key resources and capabilities -don’t copy LSEs. • Need to do if going to survive hypercompetition • Thus hi-tech SMEs able to be successful.

Overcoming SmallBusiness Barriers to Internationalization • Managers’ limited international experience • Lack of knowledge • Managers’ negative attitudes

– Belief that venture too risky and not profitable – Competition seen as domestic – Ignoring of international opportunities – Unsure of competitive advantage

Training and Knowledge Needs of Small Firm CEOs Entering Internationalization

Attitudinal Differences Concerning Internationalization

Size and Small Business Internationalization • Size barrier to internationalization

– Larger firms have more resources to support international operations • Size is an issue only in the internationalization decision, however. • Eventually, international sales intensity of small firms exceed that of big firms.

– International sales intensity: amount of international sales divided by total sales of the company

Falling Barriers for Small Businesses • Barriers are becoming easier to overcome • Government support programs for small businesses are increasing • Internet • Micro-segmentation • Trade agreements are making trade easier • Increase in small businesses engaged in international operations also makes it easier

Small Business Advantage • Speed becomes the small business advantage

– Faster innovation – Can change products and internal operations faster – Speed can overcome size disadvantages – Larger firms must often overcome bureaucratic procedures

When Should a Small Business Go International? • If the following questions are answered positively, small business is ready.

– Do we have a global product or service? – Do we have the managerial, organizational, and financial resources to internationalize? – Is there willingness to commit resources to face the risks of internationalization? – Is there a country in which the company feels comfortable doing business?

When Should a Small Business Go International? (cont.) – Is there a profitable market for product or service? – Which country should be entered? – Do we have a unique product/service that is not easily copied by multinationals or local entrepreneurs? – Do location advantages exist upstream in the value chain? – Can we afford not to be a multinational?

Getting Connected to the International Market • Participation strategies

– Same participation options as larger firms – Exporting, licensing, joint ventures, and foreign direct investment – Most small businesses often emphasize exporting

Finding Customers and Partners: Customer Contact Techniques • • • • •

Trade shows Catalog expositions International advertising agencies and consulting firms Government-sponsored trade missions Direct contact

New-Venture Strategies for Small Multinational Companies • Entry wedge: company’s competitive advantages for breaking into the established pattern of commercial activity

Copycat Business • Copycat Business

– The “me too” strategy – Adopt existing products or services – Find a niche or slight innovation to attract customers

Successful Copycat Moves • • • • • • •

Be the first to a new standard Go after the toughest customers Play to different customer needs Transfer the location Become a dedicated supplier or distributor Seek abandoned or ignored markets Acquire existing business