Traditional Stage Model And International Ventures Commerce Essay

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There are several traditional models which propose that internationalisation occurs as an orderly development with incremental steps, including innovation-related model (Cavusgil 1980; Andersen 1993) and Product Life Cycle Theory (Vernon, 1966), which suggest firms would export goods when it is in the product maturity and standardized phase. But the most frequently used and ordinary approach is the Uppsala internationalisation model (Johanson and Vahlne 1977; Johanson and Wiedersheim-Paul 1975). The fundamental concept of such model is that firm's logical internationalisation behaviour is related with the growth and use of market knowledge which increases commitment and investment into foreign markets. It also emphasizes that market knowledge can only be obtained gradually through experience in its own operations (Johanson and Vahlne 1977). Johanson and Wiedersheim-Paul (1975) suggest the four stages through the internationalisation: establishing domestic Market, exporting through agents, establishing overseas subsidiaries, and producing overseas through subsidiaries operation. It formulates internationalisation as a step-by-step rational process with distinct decision making point, and reducing uncertainty overtime. Johanson and Vahlne demonstrate the process as gradual and evolutionary with the observations of traditional manufacturing industries including engineering and pharmaceutical firms. 192

Contrarily compared to the traditional approach, 'International New Venture' (INV) 'Early internationalising firm' (EIF) or 'Born Global Firm' (BGF) is an increasingly significant approach to study internationalization of entrepreneurship. Oviatt and MacDougall (1994) define International New Ventures as "A business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries". Since 1980s, researches illustrate the emerging phenomenon that some firms do not follow the incremental approach. These firms often start international activities, including sourcing and exporting, and serve foreign markets instantly or during early stage of operation. For examples, Ganitsky's (1989) study demonstrates 18 Israeli firms serving international markets straight from inception and the report from McKinsey and Co. (1993) showing many Australian businesses were born with International management view, treating the globe as marketplace.

There are several reasons for 'Born Global Firms' to appear in the market. Resources from multiple countries are connected by entrepreneurs with international experiences and elaborated capabilities and they satisfy global market demand (McDougall & Oviatt 1991; Knight & Cavusgil 1996). The changes of market conditions and environment, such as international competition and niche market, also provide incentive and/or pressure for firms to 'born global' (Chetty and Campbell-Hunt 2004). Technological innovation reduces the costs associated with internationalisation on production, communication and transportation, but some (e.g. Prashantham & Young 2004) argue the internet as a main driving force. It replaces the traditional business needs and trust-building activities such as face-to-face communication and information sharing. Internet technology, as an intermediary, also facilitates internationalisation of small firms especially in developing regions. 260

3 The comparison of two approaches

With the comparison on two fundamentally different approaches of internationalization, there are ostensibly differences in particular for entrepreneurs and small-medium enterprise (SME) to adopt such approaches.

Existence of active internationalisation strategy

The most fundamental difference between two approaches is the existence of an active and clear internationalisation strategy in inception of the "Born Global Firm" which is absent in traditional stage model. The passive process shows that there is no motivation for firm to internationalise and it is not included in the firm strategy. In fact the Traditional view treats internationalisation as development of firm with standard patterns which does not involve managerial influence. On the other hand 'Born Global Firm' recognises the competitive advantage of rapid internationalisation and therefore it has implication for management in the early stage (Chetty & Campbell-Hunt 2004).

Pace of internationalisation and capability:

In Traditional stage model, start-up enterprise has limited capability to internationalize, suggesting a strong presence and sustainability in domestic market are a necessity to internationalisation. Chandler (1986) suggests multi-national enterprises (MNE) is mostly developed from mature domestic corporations due to the needs of high engagement in FDI activities (e.g. establishing a subsidiary overseas). Moreover, it is viable for SME to expand to overseas market, but with limited knowledge, it has to absorb high risk to make extensive market commitment. To make it precise, knowledge acquisition is a process that is necessary for SME to internationalize. (Johanson & Vahlne 1977). As the approach, start-up enterprise should therefore grow to certain size and take small steps gradually to gain such capability in order to eliminate the constraints.

However, International New Venture Model treats SME from another perspective. Process of knowledge acquisition no longer required with the owner-manager who is equipped with international experience in 'Born Global Firm'. Such experience also diminishes the concern of uncertainty on entering international market (Madsen & Servais 1997). If there is lack of experience, strategic alliances such as partnership and joint-venture in foreign countries may be taken (McDougall et al. 1994), and it is contributed from entrepreneur's network and inter-personal relationship (Harris and Wheeler 2005). The role of joint-venture/partnership may also serve as a mean to overcome the lack of initial resource and capital. Therefore while traditional stage model emphases the gradual stage process, INV already equips with such capacity from an early stage since time to internationalise is crucial to it success.

Geographical and Psychic distance

Another entrepreneurial behavior predicted by the Traditional Stage model is that internationalisation process is based on the psychic distance of foreign market (Johanson and Vahlne 1977). Figure 01 shows such incremental process of traditional stage model.

Figure 01

Factors, including differences in language, culture, business practice and industrial development, decrease the pace of market penetration (Johanson & Wiedersheim-Paul 1975). There is a tendency that market with greater psychic distance will be entered in later stage of the international market expansion.

However, in International New Venture, psychic distance has less influence on 'Born global' firms. Psychic distance has been reduced by cultural and social homogeneity through by globalisation and the use of advanced ICT such as online instant-translation, email and internet, which breaks the tendency mentioned above. Beside numerous examples of technology-related firms with virtual products distributing through internet, Hong-Kong-based Fashion Brand "TeeLocker" has demonstrated the application of the model on exporting and sourcing internationally. With about GBP2500 start-up capital, "Teelocker" could not hire designers for a collection. Instead, founder Fuk-Sang Lai decided to establish a Web2.0 platform to collect designs globally and now more than half of the designs come from overseas such as Japan, Italy, America, U.K. and etc. International market is opened through internet and also stores are established in Hong Kong, China and America. The huge success within two years brings in profit of HKD610000 per month. With the strong internationalised intention, "Teelocker" has successfully used the internet as a medium to enter several markets with multiple cultural clusters, and break the physical distance to accumulate resource from the globe. The correlation of psychic distance and stage of internationalisation is broken in this case.

Domestic Market

The similarities and differences of the two approaches on domestic market are interesting to address and compare. Firstly, the two approaches have perceptions on domestic market. Traditional stage approach treats domestic market significantly as a foundation to expand to overseas market as the basic concept mentioned before. However, in International New Venture, home market is not regarded as important since it is not required to have a strong domestic market to support the internationalisation process. In fact, the whole world is treated as a 'single market' by 'Born Global Firm' (Chetty & Cambell-Hunt 2004). Moreover, it is even suggested that "firm in a nation with small domestic markets have a higher propensity to become Born Global than firms in nations with large domestic markets," (pp.578, Madsen & Servais 1997), which contradicts to the stage approach perspective.

Regardless of this prominent difference, both of the approaches recognize the impact domestic market has on shaping internationalization activity of a startup enterprise. Freeman et al. (2006) argues that internalization can be facilitated by a small and financially unsustainable home market with low demand. It is supported by the examples of industries with high sunk cost such as high-end technological-based business. These industries have small, well-developed and saturated domestic markets where most demands have been exploited. Thus, they have to go aboard to capitalize demands from new markets. To some extent it brings the two contrary models together, as traditional stage approach suggesting firm starts to establish overseas market when the demand from domestic market is highly fulfilled (Vernon, 1966).

4 Applicability: which is better?

Many studies have suggested that, high-technology related industries are particularly suitable for International New ventures and born global behaviours (e.g. Bell 1995; Oviatt & McDougall 1994). Knight and Cavusgil (p.11, 1996) even state the definition of INV as "Small, technology-oriented companies that operate in international markets from the earliest days of their establishment". Comparatively, traditional manufacturing industries tend to follow the stage model and there might be difficulties for them to internationalise in really short period. Does it mean that technological involvement in the industry related to the speed of internationalisation?

Haier, a Chinese MNC white goods producer, has adopted an innovative internationalisation strategy. After seven years of Haier's effort and the establishment of a mature Chinese domestic market, it started to export products to Germany in 1992 (Du 2005). With the huge success by the "first difficult, then easy" principle, Haier developed a strong planning on international expansion with full scale operations such as factories in South-Carolina for US market, Pakistan and Jordan for Middle East and production facilities in five African countries and Italy for European market in short period of time (Bonaglia et al. 2007).

Haier's strategies innovatively apply the internationalisation theory. As a traditional white good manufacturing industry, it followed the stage model to establish strong domestic market. But soon after the export, it skipped to stage 4 the overseas production. Germany as the first export market does not fit the psychic distance theory as well. As a late-mover Haier shows that successful internationalisation does not only base on a specific model and there is no absolute answer on technology-based firms having definite advantage on pace of internationalisation. It rather "depends on the innovative skills of the firm than the innovation degree of the industry" (Madsen & Servais 1997).

5 Conclusions

The essay shows the different arguments surrounding internationalisation in entrepreneurship. The Stage Model provides a solid and relatively traditional view of internationalisation, while International New Venture Model has a closer linked with the contemporary side. The two approaches are very diverse in most aspects, including the existence of internationalisation in firm's strategy, different pace of internationalisation, and geographical and psychic distance followed by brief findings on their similarity on domestic market issue. Since the INV Model is inspired and further developed by the stage model, comparing the two approaches provides a substantive contrast and showing certain weakness of the latter. Applicability section with the case study of Haier demonstrates that simply following the model may not be enough to gain the most of benefit of internationalisation, and there is no "one-size-fit-all" strategy.