Internationalization as Business Strategy
Table of contents
What is internationalization?
Crossing borders for economic reasons has been a practice that dates back thousands of years. Nowadays, businesses, including family-owned and publicly traded ones, operate on an international level. Smaller companies, such as start-ups and medium-sized businesses, also pursue opportunities for growth by entering international markets. [12]
The process of internationalization has become increasingly common among companies, resulting in the global diffusion of products, technology, and knowledge. This is due to both the necessity and ease of expanding business activities abroad. While multinational firms dominated international business in the past, recent developments have allowed all types of companies to participate and benefit. [12]
„Internationalization refers to the increasing importance of international trade, international relations, treaties, alliances, etc. Inter-national, of course, means between or among nations. The basic unit remains the nation, even as relations among nations become increasingly necessary and important. “[19]
Why and how do companies internationalize?
Internationalization helps businesses gain global recognition, competitiveness, and increased sales in markets with high barriers [14]. Motivations for internationalization include accessing new markets, targeting specific customer groups, and overcoming domestic market crises. It also reduces risks through diversification, maximizes economies of scale, and leverages the product life cycle for financial success. Three types of motivations are intrinsic, extrinsic, and mixed: [24]
Intrinsic motives: Companies expand internationally to access new markets, resources, expertise, and improve overall efficiency.
Extrinsic motives: Factors outside the company, like home- and host-country conditions, drive international expansion to capitalize on opportunities or overcome challenges.
Mixed motives: Combination of intrinsic and extrinsic factors influenced by industry dynamics, market structure, and competition [24]
There is a variety of ways in which an organization can internationalize. A company may decide to internationalize a portion of its manufacturing or services or even just one aspect of a multi-level production, such as sales. The decision of what is internationalized and how this is executed is crucial since these decisions will determine whether a company's expansion is successful or not. [14]
How is internationalization different when it comes to expanding within the European Union?
When a company is created and registered as a European organization, it has the power of expanding across the European Union using a specific single set of rules.
According to the official website of the European Union the requirements to be considered a European organization are:
A company must be registered in the same country as its head office
There must be a presence in other EU countries either as a subsidiary or a branch and they must comply with the laws of the countries in which it is present.
There must be a "minimum subscribed capital of EUR 120 000" [22]
There must be a plan of action for internal communication amongst the company representatives and other bodies within the organization.
Once a company has complied with all the requirements it is now considered a European organization. Tt can take advantage of the benefits that come with being able to expand into European markets. [22] However, companies must analyze the potential market rules and regulations as they may vary depending on the nation.
IKEA
One example of a company that has successfully internationalized across Europe is IKEA. IKEA is a Swedish multinational furniture retailer that designs and sells ready-to-assemble furniture, kitchen appliances and home accessories. It was founded in the 1940’s.
IKEA began its internationalization efforts in the 1960s by expanding into neighboring Nordic countries, followed by the rest of Europe, and then eventually, expanding globally. Today, IKEA has stores in over 50 countries, including numerous locations throughout Europe.
IKEA's success in Europe can be attributed to several factors, including their strong brand reputation, their ability to adapt their products to local markets, their focus on sustainability, and their commitment to providing affordable prices. Additionally, IKEA has invested heavily in their supply chain and logistics systems, which has allowed them to efficiently manage their operations across multiple countries.
IKEA has improved its global market entry strategy by learning from past mistakes, which has resulted in increased market share and plans for further expansion. The franchise groups in different countries are becoming more distinct from the Swedish original, and the company can celebrate cultural differences while maintaining a common core identity. [26]
Internationalization Strategies
Different Ways to Enter International Markets
Exporting
Global Sourcing
Licensing, Franchising and Acquisition
FDI
Strategic alliances
Joint Venture
Greenfield investments
Turn-Key
There are different strategies that can be used to enter international markets seen in the graphic below which differ in control, resource commitment, flexibility as well as risk. Exporting, Global Sourcing, Franchising, Licensing, Joint Venture and Foreign Direct Investment will be discussed in more detail.
Factors such as control, flexibility, resource commitment, and risk play significant roles in determining companies' international market entry strategy. Control refers to the level of influence and decision-making authority a company maintains, while flexibility relates to the ability to adapt and respond to market dynamics. Resource commitment refers to allocating financial, operational, and human resources, and risk pertains to the potential uncertainties and challenges associated with entering new markets. [23]
In addition to the dimensions mentioned, the factor of profitability also comes into play. Typically, higher levels of risk, resource commitment, and lower flexibility are associated with the potential for greater rewards and benefits. Companies may be willing to take on these challenges and invest more resources in order to reap potentially higher profits and returns.
Low Control Strategies
Exporting and Global Sourcing are considered "Low Control Strategies" with limited control in foreign markets. These strategies have advantages such as fewer obligations and resource investments, allowing flexibility and lower risk. However, they offer lower investment returns and require minimal commitment. Many companies choose low-control strategies due to the lower risk involved. [12]
Exporting
Exporting involves manufacturing goods or services in one country and distributing them in another. Developed economies often outsource manufacturing to developing nations. Global trading is facilitated through product flow between countries. For instance, Finland and Belgium bolster foreign exchange reserves to cover imports. Exporting enables easy market entry and exit with low risk and expense. [12] Small and medium-sized European businesses predominantly focus on intra-EU trade, while only a quarter engages in international exports. [20]
Exporting in the European Union
The European Union holds a dominant position in global trade due to its open trade policies, making it a highly attractive region for conducting business. With daily exports worth hundreds of millions of euros and imports in similar quantities, the EU holds the top spot as the world's largest exporter of both manufactured goods and services. Additionally, it is the primary export destination for approximately 80 nations worldwide. When combining the imports and exports of all EU member states, they account for 16% of the world's total trade. [27]
Global Sourcing
Global Sourcing is another "low control strategy." It essentially relies on having a contract between a buyer. This can be a local company and another company that is the supplier. In more straightforward terms, it's importing materials to be sold in another country. For example, the supermarket "Carrefour," a French retailer, is a large-scale importer. It sells products from other countries in its stores. This is especially beneficial to the company when it's a new product in the market, and there is less competition. [12]
Moderate Control Strategies
Compared to low control methods, the level of flexibility in the moderate control strategies is lower, but the level of control is higher. Franchising and Licensing are two separate methods of moderate control strategies.
Franchising
Franchising allows effective control over franchisees in foreign markets. It involves a contractual arrangement where the franchisee uses a proven business formula. The franchisor receives payment for trademark use, training, and supplied merchandise. Franchising, exemplified by global brands like McDonald's, Subway, and Domino's, offers an entry into new markets with minimal financial investment. Franchisees bear expenses, resulting in lower profits for the franchisor. Limited control over franchises can lead to issues with franchisees. Successful franchising requires considerations of local culture and a well-planned strategy for promotion and success in the new market. [11]
Example: Airline franchising in Europe
Airline franchising in Europe is a strategic response to air transport deregulation. Smaller airlines gain access to established brands and systems of larger carriers, boosting visibility and competitiveness. Larger airlines expand market share through smaller franchisee networks. Benefits exist for franchisor, franchisee, and consumers, but dominance of one major carrier may hinder competition. Franchisee airlines adopt franchisor's public identity, while franchisors provide reservation and revenue accounting systems. [38]
Key Elements of Airline Franchising in the EU
One airline (franchisee) gains the right to assume the public identity and brand of another airline (franchisor) for a fee.
The franchisee retains operational independence and makes decisions on routes, schedules, and pricing.
The franchisor provides services such as sales and reservations systems, revenue accounting, and frequent flyer programs to the franchisee.
The franchisee agrees not to compete directly with the franchisor and cooperates to maximize feeder traffic.
The commercial risk of the franchised flights lies with the franchisee. [38]
Licensing
According to Schmid, licensing involves a contractual agreement where a domestic licensor grants foreign licensees the rights to certain assets in exchange for royalties [13]. Coca-Cola utilized multiple licenses to expand internationally by allowing businesses outside the US to bottle and distribute their soft drinks [13]. Licensing is a common method to enter new markets, although there can be concerns regarding product usage, technology transfer, or quality control [11].
Licensing of Barbie in Europe
Barbie, manufactured by the American toy company Mattel, is a popular brand of fashion dolls with a significant global presence, including Europe. Mattel has licensed the Barbie brand to multiple European companies, allowing them to produce and distribute various Barbie-themed products, such as clothing, accessories, and home decor. These licensing agreements leverage the Barbie name and image to target consumers interested in the brand. [39]
For Mattel, licensing Barbie in Europe presents an opportunity to expand the brand's reach and generate additional revenue through licensing fees and royalties. European companies benefit by capitalizing on Barbie's popularity and attracting consumers interested in Barbie products. Overall, Barbie licensing has proven to be a successful strategy for both Mattel and European companies. [39]
High Control Strategies
High control strategies, like joint ventures, minority-owned equity, and wholly owned subsidiaries, provide businesses with greater control but also higher risks. A cross-border joint venture involves the establishment of a joint enterprise with foreign firms, combining resources, expertise, and labor. [13]
Equity Joint Ventures
Joint ventures are strategic alliances between firms that combine resources and capabilities to enhance competitiveness. They help firms establish barriers to entry, reduce competition, and increase profitability. Joint ventures are commonly used as an entry strategy in international markets, particularly in markets with investment restrictions. [40]
Minority-owned vs. Majority-owned equity joined venture
Choosing between majority and minority ownership in a joint venture has its advantages and disadvantages. With majority ownership, a business owner retains decision-making power and control, making it suitable for those not yet ready to retire but seeking outside expertise or additional capital. On the other hand, relinquishing majority ownership to a new partner can be the first step towards exiting the company and transitioning to new management. [41]
Wholly owned subsidiaries (Foreign Direct Investment)
Foreign direct investment (FDI) refers to investment made by a company in one country, to acquire a lasting interest in a business enterprise operating outside of its home economy. FDI allows the parent enterprise to control its foreign affiliate, and can provide a wide range of benefits to both the investing firm and the host country. [42]
Lenovo
In 2005, Lenovo utilized joint ventures, strategic partnerships, and acquisitions to become a major player in multiple PC markets, establishing itself as a leading computer seller. One of their joint ventures was the NEC Lenovo Japan Group, formed with technology company NEC, where Lenovo held the majority of shares. This partnership allowed both companies to share risks and benefit from their collaboration. While Lenovo's ownership of the shares no longer qualifies it as a traditional joint venture, it can be classified as either a majority-owned or minority-owned equity joint venture. [13]
Foreign Direct Investment in Europe
Europe is the world's largest destination for Foreign Direct Investment (FDI), with intra-European investment being the primary source. The creation of a single market through European integration has facilitated cross-border investment and increased Europe's attractiveness for FDI. Unlike other regions, Europe places greater emphasis on the service sector as the main recipient of FDI, while manufacturing and resource extraction receive less focus. FDI in Europe has contributed to economic development by introducing new technologies, management practices, and market access, fostering innovation and growth. However, there is a need to balance the benefits of FDI with protecting local industries. Overall, Europe's unique characteristics make it a significant FDI destination. [43]
The Integration-Responsiveness Framework
The Integration-Responsiveness Framework helps managers in multinational corporations understand and interact with unique national markets and diverse businesses. It emphasizes global integration, value chain management, and country-specific risk assessment. Based on around 20 case studies and numerous interviews, the framework optimizes cross-border integration for maximum global effectiveness. It categorizes business environments into four types: global, multinational, international, and transnational. [1]
Global Environment
Global companies thrive in this climate because of the push of global integration, and not being under pressure to be locally responsive. Focusing on cost advantages is the most crucial component of the modern corporate climate, and centralized global scale operations are the best method to achieve this. It's essential to recognize that this ecosystem requires several resources, both centralized and globally scaled. [1]
Apple products are sold all round the world and the products are not customized for local users and different countries. Only minor details are changed like keypads for different languages, the overall product stays the same. One key aspect of Apple's global integration strategy is the consistent design and functionality of its products. The company's products, such as iPhones, iPads, and MacBooks, are sold and used by people all around the world, regardless of their geographic location or cultural background. While the overall product remains the same, Apple does make minor adjustments to accommodate specific markets. For example, different language options are available for the device's keypad, allowing users to input text in their native languages. [44]
Multinational Environment
Multinational businesses are the counterpart of global businesses in that they place more emphasis on local response. Other than in the global business, they need to concentrate on country distinctions and be able to exploit those characteristics to both establish a strong presence and respond to local opportunities. The team who is operating in the area must be self-reliant and powerful enough to seize these opportunities. [2]
The food and beverage company Nestlé is a good example of a company that focuses on local responsiveness. Nestlé adapts its products to local tastes and preferences, such as offering different flavors of KitKat in Japan or Maggi noodles in India. The company also tailors its marketing strategies and distribution channels to local markets, which helps it compete effectively with local rivals. The company also actively engages with local communities, collaborating with local farmers and suppliers to source ingredients and support sustainable agricultural practices. This commitment to local partnerships and social responsibility further demonstrates Nestlé's embodiment of the integration responsiveness model in a multinational environment. [45]
International Environment
Businesses operating in an international context do not need to concentrate on either integration or responsiveness, in contrast to those operating in a global and multinational setting. They utilize all of the company's skills in all of their facilities in addition to the knowledge that they currently have. Knowledge is created in one central area, then distributed to all units. [2]
Rolex and Starbucks are two prominent brands that exemplify the International Environment of the Integration Responsiveness Framework. Both companies have successfully expanded their operations globally while maintaining a consistent brand image and product offering. Rolex, known for its luxury watches, embodies integration by adhering to high-quality standards and craftsmanship across all its global markets. While the core design and functionality remain consistent, Rolex responds to local preferences by offering variations in styles and materials to cater to diverse consumer tastes.
Similarly, Starbucks, a renowned coffeehouse chain, integrates its operations by providing a standardized menu and service experience worldwide. However, Starbucks also embraces responsiveness by adapting its offerings to local tastes, incorporating regional flavors and specialty beverages, making it a favored destination for coffee lovers in various cultural contexts. These brands showcase the balance between integration and responsiveness, effectively navigating the complexities of the international marketplace. [52]
Transnational Environment
The transnational business environment is highly complex, requiring companies to focus on both local differentiation and global integration. To succeed in this environment, companies must establish independent national units capable of exchanging information for global operations. Effective and efficient communication is crucial for success. [1]
Procter & Gamble (P&G) is a prime example of a company that achieves a balance between global integration and local responsiveness. It utilizes a centralized R&D and supply chain management system for efficiency and consistency across markets. P&G also customizes its products to cater to local preferences, offering different fragrances of Tide detergent in various regions. Additionally, the company adapts its marketing strategies and distribution channels to connect with consumers and capture market share. By leveraging centralized systems for efficiency and consistency, combined with localized product customization, marketing, and distribution, P&G effectively balances the benefits of global integration with the need to adapt to diverse consumer demands, fostering its success in the transnational marketplace. [47]
Analysis of internationalization using methods and strategies
SWOT Analysis: Strengths, Weaknesses, Opportunities, and Threats
Conducting a SWOT analysis can help a firm understand how to capitalize on internal strengths and external opportunities to mitigate weaknesses and overcome potential threats. This framework allows firms to identify their strategic position and competitive advantage by analyzing inner strengths and weaknesses and assessing the external environment to identify potential opportunities and threats. [3]
Strengths and weaknesses are internal. This means that they can be controlled and changed by the company. Examples are team management, patents, intellectual property or location.
Opportunities and threats are external. Companies can take advantage of opportunities and protect against threats, but can’t change them. Examples of external factors are competitors, prices for raw materials or customer shopping trends. [33]
TOWS Matrix: Adaptation of the SWOT Analysis
Weihrichs TOWS Matrix is an adaptation of the SWOT Analysis. It is used to analyze further an organization's internal and external situation. [18] During the SWOT analysis, the focus is on internal factors initially, whereas in TOWS, the analysis of external factors precedes the evaluation of strengths and weaknesses. Hence, a company must first conduct a SWOT analysis. From the drafted conclusions, it must consider how the firm can strategically take advantage of the opportunities and threats to create good strategic options.
While SWOT is nothing more than a descriptive tool which is also its greatest weakness, the TOW Matrix tries to eradicate the weaknesses of SWOT and uplift its Strengths. [3]
STRENGTHS:
Over the years, Zara has successfully established a well-known brand reputation offering a comprehensive product range for their clients. The items they offer are unique and trendy, allowing the brand to grow its presence worldwide. They have built a distribution network that enables the brand to deliver quick-style garments in different sizes across multiple stores worldwide. The Inditex group continues to invest billions in boosting its online sales focusing on developing an appealing online buying experience while integrating existing physical infrastructure. [30]
WEAKNESSES:
However, fast fashion focuses on designing products that have a substantial environmental impact from a production and distribution standpoint which causes Zara to have a maximized environmental footprint. In addition, fast-fashion items are not durable, affecting the quality of the products they offer. Another weakness of the famous fast fashion brand is its weak presence in the US and Asia-Pacific regions. [30]
Example of a SWOT-Analysis for Zara
Zara is a multi-national retail store that belongs to Inditex, the world’s biggest fashion retailer. As of 2022, Zara had more than 3.000 stores in 96 countries and global sales of approximately 32,57 billion euros. [31] [32]
OPPORTUNITIES:
Zara responds to trends as soon as they emerge. The brand is known to implement a trend into their products from start to finish in 2 to 3 weeks. Other cuts in delivery cycles are expected in the future. Thanks to AI, Zara as well, is collecting data and segmenting the customer base after analyzing the data. This allows for providing personalized suggestions to customers. According to research, influencer marketing is the most effective strategy to promote lifestyle brands. While Zara is already increasingly working with influencers, further collaboration is recommended. [30]
THREATS:
Zara’s biggest competition in the traditional sense would be H&M. However, other competitors such as the Chinese fast-fashion brand Shein are increasingly becoming competitive. A Fast-Fashion-Company’s primary goal is to offer products featuring the latest trends at low costs. This industry is extremely vulnerable to imitators waging price wars to leech off from Zara’s line. Furthermore, people are getting more and more conscious of the fast-fashion industry’s negative impact on the environment. Zara will need to change in order to make fast-fashion a sustainable business. [30]
Global Market Opportunity Assessment (GMOA)
GMOA is a strategic process that assesses a company's readiness for international markets. It evaluates product suitability, screens target countries, and estimates market potential and sales. GMOA helps companies gather data to make informed decisions and seize opportunities in uncertain foreign markets, leading to enhanced performance and success. [53]
Following are the six activities:
Analyze organizational readiness to internationalize.
Assess suitability of products and services for foreign markets.
Screen countries to identify attractive target markets.
Assess industry market potential, or market demand, for the product or service.
Select qualified business partners, such as suppliers or distributors.
Estimate company sales potential for each target market. [53]
PESTEL Analysis
PESTEL (also known as PESTLE) is a framework that identifies and analyses external political, economic, social, technological, environmental, and legal factors. It provides the company with a clear direction and understanding of threats affecting an organization's market environment. PESTEL should always be used with a combination of other frameworks, such as the SWOT Analysis or the Boston matrix, to ensure that the firm gets a clear picture of the internal and industry environment. [4] When the PESTEL factors are combined with external micro-environmental factors and internal drivers, they can be classified as either opportunities or threats in a SWOT Analysis. [34] The PESTEL method is often used before launching a new product, expanding into a foreign market, or looking at alternative market routes. [4]
While the underlying method is the same in all cases there are different variations to the PESTEL Analysis. Some of them are stated below: [34]
Pros and Cons of the PESTEL Analysis
The PESTEL Analysis helps to look at different and influential factors that could affect the success of the product at the same time. Also, it can be of use in identifying and exploiting new opportunities and threats. Lastly, this method can encourage the development of strategic thinking within the company. [34] [35]
Although there are many advantages to using the PESTEL framework, there are also many disadvantages. The process is considered being time-consuming. If not conducted regularly, the effectiveness of the PESTEL Analysis is not guaranteed. Also, the oversimplification of information can lead to insufficient data, which can be problematic when identifying new opportunities and taking action to mitigate identified issues. [34] Lastly, each decision is subjective and could become costly as the framework must be done constantly to avoid outdated data. [4]
Timing Strategies
Timing strategies are referred to as the entry timing of the markets and the phases involved. This term differs from the market-timing strategies in the investment area, which refers to the act of moving money in or out of a financial market or switching funds between asset classes. [11]
There are three market entry strategies: Waterfall, Sprinkler, and Wave. The Wave strategy involves launching the product simultaneously in countries with similar cultures and characteristics. The Sprinkler strategy involves launching the product at the same time in all appropriate countries. The Waterfall strategy, on the other hand, entails launching the product in one country first and then expanding to new markets only after establishing sales in the previous one. [36] The timing strategies are explained in more detail below.
The Waterfall Strategy
The Waterfall Strategy relies on teams following a sequence of steps and never moving forward until the previous phase has been completed. The traditional form of this strategy leaves almost no room for unexpected changes or revisions. As a result, the Waterfall strategy is much more suitable for a small team and predictable projects. [6][7]
The Waterfall Strategy is used by a company to introduce a product sequentially in different markets. This approach gives the company an opportunity to gain an understanding of each market and make the necessary adjustments to its marketing mix. This simplifies the process for the company to meet the distinct requirements of individual markets. [37]
Pros and Cons of the Waterfall Strategy
Advantages
Provides an opportunity to gain comprehensive insights into the market.
Enables the company to tailor its marketing mix to satisfy the distinct needs of individual markets. [37]
Offers a logical structure that is easy to understand and manage: This strategy is suitable for predictable projects and ensures more predictable results. [7][9] There are some clearly defined deliverables in each stage to review and approve.
Permits the renewal of products in the development stage, draws out the life cycle while keeping a steady situation inside the market, and limits risks. [9]
Disadvantages
Lack of flexibility: Due to its linear nature, it is difficult to reverse a step in the process.
The cost of defect elimination may be increased as errors in the requirements and design are only detectable until the testing phase.
Not suitable for time-sensitive projects because it takes a long time to produce a working product in the development life cycle. It may be a poor choice for high-uncertainty and high-risk environments. [7]
The Sprinkler Strategy
The Sprinkler strategy is used when a company introduces a product simultaneously in multiple markets. [37] Companies using this strategy usually tend to pursue the high benefits that an early entry provides. Due to its high-risk and high-reward characteristics, it is much more suitable for products with a shorter life cycle, such as technology products. This strategy can be used at the Introduction and Growth Stages of the Product Life Cycle.[5][7]
In this strategy, companies are trying their best to establish themselves, promote the products and build client bases. Then, the companies receive benefits from different markets. This process is similar to a water sprinkler. The companies may gain little in a single market as in the waterfall strategy, but adding the benefit from numerous markets will be a more significant benefit. [9]
Another factor to consider is that the Sprinkler approach entails standardization in the entry process, but this does not imply that everything must be uniform when entering a new market. It is important to adjust to the local culture.
Pros and Cons of the Sprinkler Strategy
Advantages
Good choice for companies in an outrunning competition and can help gain the technological edge or utilize the first-mover advantage: The first-mover will have more time to research and develop to know the market better and make some adjustments.
Increasing the possibility to gain a large number of benefits by entering many markets at the same time. It refers to the income and the chance to register intellectual property. [9]
Disadvantages
High risk because of the simultaneous penetration in multiple markets
Requires significant resources and production capacity [37]
The Wave Strategy
The wave strategy is a simultaneous business expansion to several foreign markets. This strategy has some similarities with the waterfall strategy. The wave-like business expansion can be divided into stages, and each stage incorporates a group of markets. Unlike the sprinkler strategy, the wave strategy classifies suitable markets into groups by analysing the culture and business environments. [9]
The wave strategy involves selecting a group of markets that are most similar to the domestic market for the initial expansion. This allows for the transfer of the business model from the domestic market to these markets due to the similarities. Once the initial expansion is successful, the company can move to the next set of foreign markets, which are progressively less similar to the domestic one. As a result, the profits and experience gained from each previous group compensate for the potential risks of each subsequent market. [9]
Pros and Cons of the Wave Strategy
Advantages
Combines the expanse of the Sprinkler strategy with the safety of the Waterfall strategy.
Cost-effective because of the minimal risk of each particular market. [9]
Disadvantages
One’s competitive advantage can be lost because of the permitted possibility of entering all the available markets at once.
Consumes extra time for analyzing markets in order to group them. More detailed analyses are required as well. [9]
Choosing a Foreign Market Entry Strategy
Factors to Consider When Choosing a Foreign Market Entry Strategy
The decision of a firm to choose its entry mode for a particular product or target country is influenced by multiple conflicting forces. Predicting the magnitude and direction of these forces makes the entry mode selection process complex, involving trade-offs among different options. Generally, the choice of entry mode should prioritize its potential impact on profitability. However, this can be challenging, particularly in foreign markets where data availability is limited. [56]
Some of the factors that need to be considered are:
The core business goals and objectives of the firm have major role in guiding a company’s operations therefore chosen market entry strategy should also facilitate the achievement of those goals. Although firms are typically seen as profit maximisers, we can observe a shift towards the concept of shared value, where profit comes hand in hand with giving back to society. A company may prefer to set up a base of operations and manufacturing in a target market if they are conscious of their carbon footprint from purely exporting, even if it means that they give up a higher profit margin.
International experience is another firm-specific factor influencing mode choice. The extent of a firm's involvement in operating internationally, either in a particular country or in the general international environment, contributes to its experience. This experience reduces the cost and uncertainty of entering foreign markets and increases the likelihood of resource commitment. According to Johanson and Vahlne (1977), direct experience in international markets, rather than objective knowledge acquisition, reduces market uncertainty and encourages firms to allocate additional resources to foreign markets [56]
Similarly, the firm’s resource capacity, especially the level of excess capacity the firm can devote to international expansion impacts the ability of the firm to choose which strategy to follow.
The physical attributes of a product or service, such as its value/weight ratio, perishability, and composition, significantly influence production location and entry mode selection. Products with high value/weight ratios, like luxury watches, are often suitable for direct exporting when production economies of scale exist or when maintaining control over production is important. Conversely, industries such as soft drinks and beer tend to establish licensing agreements or invest in local production facilities due to the high costs of shipping to distant markets. The nature of the product also impacts channel selection, as products vary in characteristics, usage, and selling requirements. Technical products may require pre- and post-sale services that some intermediaries cannot provide, leading firms to opt for hierarchical entry modes. Product differentiation, including physical variations, brand reputation, advertising, and after-sales services, allows firms to absorb higher costs in foreign markets, create entry barriers, and enhance their competitive position by effectively meeting customer needs. [56]
Country risk/demand uncertainty. Foreign markets are typically considered riskier than domestic markets, and the level of risk a firm faces depends on both the market itself and its chosen method of entry. Apart from financial investments, the firm also faces risks associated with inventories, receivables, and exchange rate fluctuations. Additionally, political risks can pose significant challenges. When the country risk is high, firms tend to limit their exposure by opting for entry modes that involve lower resource commitments, such as export modes. Unpredictability in the political and economic environment of the host market increases perceived risk and demand uncertainty, discouraging firms from choosing entry modes that require substantial resource commitments. Instead, flexibility becomes a highly desirable characteristic. [56]
Sociocultural differences between a firm's home country and the host country can create internal uncertainties, influencing the preferred mode of entry. Socioculturally similar countries share common business practices, language, educational levels, and cultural characteristics. The greater the perceived distance in culture, economic systems, and business practices between the home and host country, the more likely firms are to opt for joint venture agreements over direct investment. Joint ventures provide flexibility, allowing firms to withdraw from the host market if they struggle to adapt to the unfamiliar environment. In summary, when there is a significant perceived distance between the home and host country, firms prefer entry modes with lower resource commitments and greater flexibility. [56]
Market size and consumer demand for the firm’s product will influence how heavily the firm will want to get involved if at all in a market. As firms are primarily profit seekers, if there is little potential for growth in the market the firm may choose to look elsewhere. Even with a large market size, the market concentration ratio can deter a ‘high-control’ entry initially. Whether there are a large number of competitors, the market power of the largest competitors may deter high-involvement entry as this could increase the barriers to entry. A high concentration ratio would mean that it would be much harder for the firm to gain a significant market share straight away to recoup their costs of entering the market, this may mean a firm will again opt for a low resource commitment strategy to gain a footing in the market first and then choose to expand once already in the market, rather than entering with a ‘higher-control’ strategy straight away. [23]
Stages and Speed of Internalisation
Stages of Internationalization in Business
With reference to the process models of internationalisation, Welch &Luostarinen (1988) define internationalization “as the process of increasing involvement in international operations”. It allows companies to adapt their products to meet the needs of consumers in foreign countries.
The choice of internalization strategy depends on the stage of internationalization the company is in. There are 4 stages that we defined in this article. Also important to note that some companies can internationalize more rapidly or slowly than others - speed of internalisation will be covered in the next section.
The Uppsala Internationalization Modell
The Uppsala Internationalization Model is a sequential approach to internationalization developed by Swedish researchers (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977). It suggests that firms should gradually increase their commitment and resources in foreign markets, starting from their domestic market. The model emphasizes the importance of market knowledge and learning through direct experience. The model highlights the role of knowledge, commitment decisions, and current activities in shaping the internationalization process. Overall, it promotes cautious and sequential expansion into new markets based on increasing market knowledge and commitment. [54]
It identifies four stages of international market entry:
No regular exports
Export via independent representatives
Establishment of a foreign sales subsidiary
Foreign production manufacturing units [54]
Speed of Internalization
The speed at which companies internalize can vary due to various factors that influence their decision-making and ability to expand into foreign markets. It's important to note that the speed of internalization can vary significantly depending on the unique circumstances and strategies of each company.
Figure 24: Self created summary of factors affecting Speed of Internalisation
"Born Global"
An example of rapid internalization would be companies categorized as "born global" also called International New Ventures (INVs), which are defined as:
“companies who have reached a share of foreign sales of at least 25 per cent within a time frame of two to three years after their establishment”.[51]
or
"business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. The distinguishing feature of these start-ups is that their origins are international, as demonstrated by observable and significant commitments of resources (e.g., material, people, financing, time) in more than one nation." [55]
Generally, there is no one clear definition – neither theoretically nor empirically – of a Born Global or similar concepts. Born Globals have “borderless” view of the world and develop the strategies needed to expand abroad at or soon after the firm’s founding in contrast to the traditional pattern of businesses that operate in the home country for many years and gradually evolve into international trade – term to describe skipping of classical internalization stages is called ‘leapfrogging’.
The emergence of born global firms can be attributed to factors such as globalization, technological advancements, and an entrepreneurial mindset. These firms leverage digital platforms, access to information and resources, and changing consumer behaviors to quickly expand into international markets. Supportive ecosystems further enable their rapid international growth by providing resources, mentorship, and networking opportunities. [50]
Examples of Born Global are Skype, Spotify, Netflix, Google, Logitech, Checklens and many more.
Netflix's global expansion has played a pivotal role in its tremendous success. By 2017, the company had expanded its operations to more than 190 countries, and today, nearly 73 million of its 130 million subscribers are located outside the United States. Notably, in the second quarter of 2018, Netflix's international streaming revenues surpassed its domestic streaming revenues for the first time. This remarkable feat is particularly noteworthy considering that prior to 2010, Netflix was exclusively available in the U.S. and had a presence in only 50 countries by 2015. [48]
Figure 22: Screenshot from official Checklens website (retrieved 11 June 2023).https://checklens.ai/
Another example is the EU-based company Checklens - “Born Global Champion 2022” awarded by the Austrian Federal Economic Chamber. Checklens provides camera-based image and video analytic platform for retail stores in the B2B space.
Checklists help retailers improve their in-store shopping experience and reduce inventory losses. Artificial intelligence (AI) based on visual recognition helps customers in the store. Cameras with AI at the checkout and on the shelves, fixing scanning and input errors, correct scanning and input errors enabling a seamless shopping. [49]
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