International Entrepreneurship - Internationalization Strategy Relationships

International
Entrepreneurship
Module 1 – Internationalization Theories
Winter 2012

Senthil Mukundakumar
smukunda@sce.carleton.ca
Technology & Innovation Management
Supervisor: Steven Muegge

Licensed under a CC BY-SA license

Objectives
Upon completion of the module, you will know about

• Theories on Internationalization process
• Advantages of applying each theory
• Factors influencing early internationalization

and you will be able to

• Distinguish which theory applicable for the firm
• Understand entrepreneur and firm needs for
Internationalization

smukunda@sce.carleton.ca Slide 2 Licensed under a CC BY-SA license

Agenda

1. Internationalization introduction

2. Internationalization theories

3. Comparison of theories

4. Factors determine internationalization

5. Key lessons

6. Key concepts

7. Questions

8. References

1. Introduction - Internationalization

“Internationalization focuses on the firm’s core competences
and opportunities in the foreign environment” – Penrose (1959)

“the process in which firms increase their involvements in
international operations” – Welch & Luostarinen (1988)

“the process of adapting firms operations (strategy, structure,
resource, etc.) to international environments” – Calof & Bemish
(1995)

Opportunity Commitment Adaptation


Pros and Cons of Internationalization

Pros Cons
Increasing the annual net profit or cash High initial investments are necessary, for
flows by transferring competitive example, for a distribution system
advantages to a foreign market
Using foreign sales potentials to achieve Costly product diversification due to, for
volume effects by increasing the quantity example, technological differences or a
different structure of demand can be a
prerequisite for a successful foreign market
cultivation
Improving performance and especially the Less favorable competitive structures on the
capacity for innovation by means of learning foreign market include the risk of, for
effects in the foreign market example, a price war with local companies
Risk diversification by means of cyclically Intercultural differences include the risk of
diverging developments in markets that inefficiencies when establishing a business
need to be cultivated abroad


2. Internationalization theories

Process theory Network theory
(Johanson & Vahlne, (Johanson & Mattson,
1977, 1990) 1988)

Internationalization
Theories

Eclectic/Economic theory International
(Williamson, 1975; entrepreneurship theory
Dunning, 1979) (Oviatt & McDougall,
1994)


Internationalization process theory

• Most well-known as Uppsala model or stage model
• Considers internationalization as an incremental process
of acquisition, integration and use of knowledge on
foreign markets
• Direction of the incremental internationalization process:
establishment chain (no exports, exports with the help of
independent representatives, building one’s own sales
office, on-site production) and psychic distance
(cultivation of countries with lower psychic distance and
gradual expansion)
Wholly
Exporting via
No exporting Joint venture owned
agent
subsidiary



Gradual Internationalization



State and change aspect
• The theory focuses on four aspects that firms should face
while going abroad: market knowledge and commitment,
and commitment decisions and current activities which
are divided into stage and change aspects that interact
with each other in what seems to be a cycle.

State Change

Market knowledge Market commitment

Commitment decision Current activities


• State aspects are the resources committed to the foreign
market: market knowledge and commitment decisions that
would affect the firm’s opportunities and risks.
• Market commitment stands for those resources that will be
committed as well as the degree of involvement. Market
knowledge helps the managerial team to make decisions.
• There are two main types of knowledge:
• objective knowledge: which can be transferred from
one market to another
• experiential knowledge: which is gained by
experience, learning by doing or acting.

• Change aspects are the results of the state aspects. Once
the firm know about the market they can decide the way the
firm will commit to that market, and will therefore be able to
plan and execute the current activities needed to complete
the cycle by committing to the market.
• The basic assumption of the Uppsala Model is that market
knowledge and market commitment affects both the
commitment decisions and the way current decisions are
performed and this, in turn, changes market knowledge and
commitment. The amount of knowledge of foreign markets
and operations is influenced by the amount of commitments
of resources in foreign markets, and vice versa.

Critics of Uppsala process model
• The model is too deterministic
• Does not take into account interdependencies between
different country markets
• Not valid for service industries
• Not valid in situations of highly internationalized firms and
industries
• The world has become more homogeneous: psychic
distance has decreased therefore the firms willing to
enter into large markets
• Reduce uncertainty: buy knowledge about legal and
financial standards from international consulting firm
• Firms today has easier access to knowledge ex throw
information technologies

Network theory
• A network is a set of two or more connected business
relationships, in which each exchange relation is between business
firms that are conceptualized as collective actors. (Emerson, 1981) .
• Networking is seen as a source of market information and
knowledge, which are often acquire in longer terms when there are
no relationships with the host country. Therefore, networks are a
bridging mechanism that allow for rapid internationalization
(Johansson & Mattson, 1988).
• The emphasis of the network approach is in bringing the involved
parties closer by using the information that the firm acquires by
establishing close relationships with customers, suppliers, the
industry, distributors, regulatory and public agencies as well as
other market actors. Relationships are based on mutual trust,
knowledge and commitment towards each other.

Network theory
• The ties resulted from the firm’s network, are hard to imitate.
These ties have consequences in three dimensions: a) the
information is available to the parties involved in the relationship;
b) timing, and c) referrals.
• Firms learn from the ties made in the network, information about
what is going on in the market is open to the network itself. Thus,
there is information that is not available for everyone.
• Ties influence on timing when some information reaches a
particular firm. And referrals firms get interested on other firms, in
the right time and place. Ties may be strong or weak. The
strength of ties is determined by the combination of time,
emotional intensity, intimacy and the reciprocal services of the
ties.


Network perspective
• The first step a firm must follow in order to internationalize
is the understanding of the market where it operates, its
environmental conditions and the firm’s relationships. Firm
will internationalize, only when the number and strength of
relationships brought up in the network increases, helping
their international extension. By using trust and increasing
commitment in established foreign networks, the firm gains
penetration.

International International
Penetration
extension integration


Network perspective
• After gaining penetration, firms can gain international
integration by using the network and getting involved with
other firms in various countries. Using these steps
relationships are formed, gaining the access to the market
and its resources. Resources can be controlled by the firm
itself as well as other actors involved in the network
depending on the position in the network.

International International
Penetration
extension integration


Eclectic paradigm Economic theory
It is also termed as OIL theory (Organization or Ownership-
Internalization-Location). The core content of this theory is
that the firm to be engaged in is decided on the ownership
advantages, internal advantages, and location advantages of
three joint decisions. The theory states the following
• If firm only has ownership advantages, then, the enterprise
should choose licensing arrangements means of technology
transfer.
• If firm has ownership advantages and internalization
advantages, it should select domestic production and exports.
• If firm has the ownership, the internal, and location
advantages of the three at the same time, the enterprise will
choose foreign direct investment.


Internalization advantages
• Reduce in transaction cost
• Control over operations
• Avoidance of tariff's and
other barriers

Location advantages
Ownership advantages • Low cost labour
• Tangible assets • Low cost raw material
• Patents and designs • Government incentives
• Organizational efficiencies to FDIs


Organization (Ownership) advantages
• It is the capabilities for businesses to meet their current or
potential customers demand. Ownership, firm specific
advantage, includes Patent and Trade Market, Technology,
Name recognition, Core competency of a firm i.e., an ability
meeting with the current/potential customers’ demand.
• If having the ownership advantages, the enterprise should
choose licensing arrangements way to proceed the
technology transfer over other forms of entry. The licensing
specific advantages such as knowledge-based software,
patent items or intellectual properties.


Internalization advantages
• Internalization is about decision to make an activity internal
to the firm, there’s got to be an advantage of internalized.
Internalization comes about from market imperfections.
Firms having the ownership advantages of intangible
assets, through the expansion of their own organizations
and business/management activities and the use of
internalizing these advantages, will obtain more than non-
equity transfer potential or real profits.
• Firms with the ownership and internal of the competitive
advantages do not necessarily have to choose foreign
direct investment. They can also choose to expand
domestic scale, and then exports to be fully rewarded.

Location advantages
It is external advantages to the firm. It is not owned by
enterprises but by the host country; therefore, enterprises can
not control discretionally, but adjust and take this advantage.
It is mainly characteristic in three aspects:
• Immovable factor and endowment of the host country, such
as natural resources, convenient geographical location, a
large of population
• host country's political system, policies and regulations with
flexible, concessive, and other favorable conditions (i.e., free
tariff barriers)
• Formation of good infrastructure and gathered economy.


Location advantages
Location factors directly affect foreign direct investment of
MNEs on the decision on the location and the international
production system layout, a fully foreign direct investment
rather than necessity.
Meeting with the following three advantages, firms will have
global oligopolies:
• Strategic advantage which allows it to compete effectively with
domestic firms.
• Select countries for investment which have attractive sourcing
and/or marketing environments.
• Managerial ability to coordinate operations located in foreign
countries at a cost that is less than the benefit received from
operating in these locations.

International Entrepreneurship theory
• “International entrepreneurship is defined in this study as the development of
international new ventures or start-ups that, from their inception, engage in
international business, thus viewing their operating domain as international
from the initial stages of the firm's operation.” - McDougall (1989)
• “The study of the nature and consequences of a firm's risk-taking behavior as it
ventures into international markets.” - Zahra (1993)
• "A combination of innovative, proactive, and risk-seeking behavior that crosses
or is compared across national borders and is intended to create value in
business organizations." They note that firm size and age are defining
characteristics here. But they exclude nonprofit and governmental agencies.” -
McDougall and Oviatt (2000)
• “Examination of how, by whom, and with what effects opportunities to create
future goods and services are discovered, evaluated, and exploited” – Shane
and Venkataraman (2000)
• “IE is the discovery, enactment, evaluation and exploitation of opportunities
across national borders to create goods and services” – Oviatt and McDougall
(2005)


• International entrepreneurship theory also termed as
International new venture (INV) theory
• International New Ventures (INVs) think about
internationalization from the point of inception or they
internationalize right from or shortly after inception
• International New Venture: „a young entrepreneurial firm
that is virtually engaged in international business right
from inception“ (Oviatt & McDougall, 1994)
• This phenomenon contradicts the classic
internationalization theories. Oviatt/McDougall (1994)
develop a frame of reference that explains this
phenomenon.

International new venture

Instant Internationalization



By means of the integration of international business,
entrepreneurship and international management theory,
Oviatt & McDougall (1994) develop a model that is based
on four necessary and sufficient factors for the existence of
International New Ventures:
• Organizational formation through internalization of some
transactions (an organization must own some assets, else it will
have nothing to of value to exchange)
• Strong reliance on alternative governance structures (e.g.
Networks)
• Establishment of foreign location advantages (private knowledge)
• Control over unique resources (patents, copyrights)



IET focus on entrepreneur
• Individual and entrepreneurial behaviour is the basis of
foreign market entry.
• Entrepreneur possesses the skills and enough information
to measure the opportunities in the market with ability to
create and make stable relationships with other firms,
suppliers, customers, government and media.
• The entrepreneur needs to be opportunity seeking and
internationally experienced in order to exploit the
opportunities he might see in the market and be able to
commit to it through entrepreneurial activities that would
be translated as entrepreneurial services.

3. Comparison of Internationalization theory

Main theme and Unit of analysis
Uppsala view Eclectic view Network view IE view
A process of The extent, form and Internationalization Proactive
gradual pattern of is the exploitation internationalization
international international of network process and
involvement with production was advantage. consider
developing market determined by three Relationship of a entrepreneurial
knowledge and advantages: firm can be used behaviour and
commitment of ownership (O), as bridges to other activities in
resources. location networks. bringing new
(L), Internalization opportunities.
(I).


Comparison of Internationalization theory

Method of Internationalization
Stages mode: The more O Establishment of Entrepreneur with
progression from advantage the higher relationship in more prior
regular exporting, propensity to country network experiential
exporting via internalize the O and development knowledge of
partners to advantage and the of those international
overseas more attractive a relationships in market will identify
manufacturing. foreign country as a those network enact and take
Start with low production location, (penetrate). entrepreneurial
Psychic distance hence the greater L Connect those activities through
to higher. advantage determine network in the firm.
the entry mode. different
countries.


Comparison of Internationalization theory

Strength
Emphasis on High explanatory Focus on the Not only focus on
importance of value for global dynamics and firm alone, gives
learning process in firms and provides evolution of more importance to
internationalization string logic for internationalization entrepreneurs and
internationalization rather than just his activities that
motives or patterns benefits the firm
internationalization
process


Internationalization process

Internationalization process of SMEs
Uppsala Model Eclectic theory Network theory IE theory

Market Ownership Local and Entrepreneurial
knowledge foreign behaviour/activities
business
relationships
Psychic Internalization International
distance entrepreneurship
Relationships
Location with customers
Market suppliers International
commitment competitors experience

Decides SME’s Internationalization process

4. Factors determine Internationalization
Profit
• Organizations internationalize with the motive of increasing
the profits of the company and reduce costs. This objective
of an organization to internationalize can be realized if the
company can access a large market and utilize the
opportunities in the market so that it can benefit form
economies of scale and large scale production.
Saturated home market
• Too many domestic manufacturers makes the domestic
market saturated and too competitive for many companies.
Therefore, companies internationalize to compete in the
foreign market that is less competitive and profitable to
protect the local market operations.

Factors determine Internationalization

Opportunity
• Opportunity is country specific and determined by growing
economy. The growth of the economy means that consumers
in the country will have the ability to gain purchasing power
with time and the products of the company will be bought at an
increasing capacity.
Band wagon effect
• This is a situation whereby the company decides to venture
into the global market because its competitors in the industry
or other industries are doing it. Such kind of internationalization
might be good for the company if it uses the opportunity well
and maximizes of the potential available.

Factors determine Internationalization

Shifting cost priorities
• The costs of manufacturing are driven by flexibility, quality
of products, responsiveness of customers, required skills
and the control processes. Companies internationalize
because of low costs experienced in other international
markets apart from local market
Complex international and political environment
• Exchange rates are more flexible today than before and
there are no high tariffs charged on imported products thus
influencing a lot of direct foreign investments in other
countries


5. Key lessons

• Building a relationship is a time consuming, costly and
risky process
• Founders of INVs are individuals who see
opportunities from establishing ventures that operate
across national borders because of the competencies
(networks, knowledge, and background) they have
developed earlier and are unique to them.
• The relatively rapid and disperse involvement in
foreign markets by entrepreneurial hi-tech firms can be
linked to opportunities and constraints emerging from a
network of relationships (both formal and informal).


5. Key lessons

Characteristics of successful global start-ups are:
• A global vision exists from inception
• managers are internationally experienced
• global entrepreneurs have strong international
business networks
• pre-emptive technology or marketing is exploited
• Unique intangible assets are present
• product or service extensions are closely linked
• the organization is closely coordinated worldwide


6. Key concepts

• Uppsala theory
• Network theory
• Eclectic theory
• International entrepreneurship theory
• International new venture


7. Questions


8. References
Aihei, O. 2009. An integrated framework for understanding the driving forces behind non-sequential process of
internationalization among firms. Business Process Management, 15(2):286-316
Dunning, J.H. 1979. Explaining changing patterns of international production in defence of eclectic theory. Oxford
bulleting of ecnomics and statistics, 41(4):269-296
Johanson, J & Mattsson, L.G. 1988. Internationalization in industrial systems: A network approach. Croom Helm, London,
194-213.
Johansson, J & Vahlne, J-E. 1977. The Internationalization Process of the Firm-A Model of Knowledge Development and
Increasing Foreign Market Commitments. Journal of International Business Studies, 8(1):23-32.
Knight, G.G & Cavusgil, S.T. 1996. The born global firm: A challenge to traditional internationalization theory. Advances
in international marketing, 8:11-26.
McDougall, P.P & Oviatt, B.M. 1994. Toward a Theory of International New Ventures. Journal of International Business
Studies, 25(1):45-62.
McDougall, P.P & Oviatt, B.M. 2000. International entrepreneurship: The intersection of two research paths. Academy of
Management Journal, 43:902–908.
McDougall, P.P & Oviatt, B.M. 2005. Defining international entrepreneurship and modeling the speed of
internationalization. Entrepreneurship Theory & Practice, 537-553.
McDougall, P.P, Shane, S & Oviatt, B.M. 1994. Explaining the formation of international new ventures: The limits of
theories from international business research. Journal of Business Venturing, 9:469–487.
Tuija.M, Elina. P & Vesa. P. 2011. The development of a high-tech international new venture as a process. Journal of
business enterprise development, 18:430-456
Willianson, O. 1979. Transaction cost ecnomics: the governance of contractual relations. Journal of law & ecnomics, 22:,
pp. 233-262
Zahra, S.A & George, G. 2002. International Entrepreneurship: The current status of the field and future research agenda
Zahra, S.A, Ireland, R.D. & Hitt, M.A. 2000. International Expansion by New Venture Firms: International Diversity, Mode
of Market Entry, Technological Learning, and Performance, Academy of Management Journal, 43(5):925-950.


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