Why firms pursue internationalization strategies
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Published: Mon, 5 Dec 2016
Internationalization is essential in the modern world. Internationalization process model was developed in the 1970s to describe how firms expand abroad. This model presents that internationalization is a gradual process what takes place in incremental stages over a long period of time(Cavusgil, Knight,Riesenberger ??) The process of Internationalization can be also described as “the process of increasing involvement in international operations”(Welch and Luostarinen, 1988,p.36). in spite of the many motives of companies to internationalize and the advantages which they can achieved, there are many barriers that the company must overcome for successful internationalization.
Strategic motive plays an important role in the selection of entry mode in a foreign market Today, many companies take the step to establish themselves abroad. Small- and medium sized enterprises (SME) play a key role in economic development, and the companies play an important factor in employment. On the other hand huge European and US firms such as Wal-Mart, Carrefour or even Royal Ahold are internationalizing rapidly in terms of high number of local competiton and saturated markets (Incandela et al., 1999). From mid 1990 these companies are motivated by the opportunities such as growing middle class weakness of local retailers and highly growth rates.
There are many reasons for companies to engage in the internationalization process. The factors which motivate or provoke firms as well as individuals to go international may be broadly divided into push factors known as reactive and pull factors known as proactive motivations. Firms with proactive motivations go international because they want to be on global market. However firms with reactive motivations which have to go international. Push factors include adverse trends in the domestic market that compel firms to explore opportunities beyond national boarders. At that point i can mention Google which is is a multinational public corporation invested in Internet search, cloud computing, and advertising technologies.. It si definitely a proactive motivation which pushes Google to go international. Google was a service already made from his conception to go international. If it did not went abroad, their competitors will have came up on this market. At that point Google will lose potential profit. Google is physically present in 33 countries around the world with 68 offices.
. Reactive motives are also defined at stemming from influences from the external environment such as declining domestic sales, competitive pressure. These factors are also profit advantage, tax benefit, growing competition at home. Pull factors are fadorable conditions in foreign markets that make international expansion attractive. Examples include situations where companies will to enter markets that have fewer competitors etc. Many enterprises have multiple motives for their internationalization , however, one motive is usually the primary and the rest are secondary motives (Albaum, 2005,70)
Why companies have to grow? Why they have to go abroad? The main purpose of business is to make money for the people who own the business. Lets have a look at specific examples of reasons for internationalisation of firms. The major proactive motivation for international business is profit advantage and higher margins. In these days for many goods and services , market growth is sluggish or flat. In order to increase profits management may either look to increase sales volume by selling abroad or to reduce product cost’ by producing overseas. Competition is often intense, forcing firms to go abroad. Most domestic organisations may be underserved or not served at all. At that point less competition , joint with strong market demand, leads to higher margins and profits. Good example is American Standard and Toto( from Japan), bathroom fixture manufacturers have found a more competitive environment in developing countries such as Mexico, Vietnam or Indonesia.
Of course, the expectation of higher profit may not occur right away. The profitability perceived when planning to go international is often different than in reality Initial profitability may be quite low, particularly in international start-up operations.
Unique products or technological advantage can be another important reason which push firms to go abroad. Gain new ideas about products , services, and business methods. International markets are characterized by tough competitors and customers , whose obviously have various needs. The experience of doing business abroad helps firms acquire new knowledge for improving organisations through effectiveness and efficiency. For example inventory techniques such as production leveling also known as production smoothing refined by Toyota were adopted by other manufacturers from all over the world. Again we need to look at the gap between perception and reality. Even if firms offer unique products or services they certainly can provide a competitive edge. The length of time when the product is unique depends on technology but also creativity of the competitiors. The competitive edge was often the only motive which marked the firm as asole supplier to foreign markets. In these days this type of advantage has changed because of competing technologies and the patent protection.
Firms seek opportunities for growth through market diversification. Big numbers of large and small companies obtain more than 50 % of their sales from abroad. These are Gillette, Siemens, Sony, and Biogen. When the diversify into overseas markets, firms can generate sales and profit opportunities which cannot be matched in their country. Internationalization can also extend when the life length of goods have reached maturity at home. For example automatic teller machine (ATM). In 1967, John Shepherd-Barron invented and installed an ATM in a Barclays Bank in London. Don Wetzel invented an American made ATM in 1968. The machines were also adopted in Japan. When the growth of ATMs began to slow in these countries they were introduced in the rest of the world. Today there are more than 1.5 million ATMs worldwide(Cavusgil, Knight, Riesenberger,???)
Firms sometimes go abroad to develop economies of scale in sourcing, production, marketing, and R&D.(Economies of scale definition) For example in the production of a complex item such as a motor car. The production process involves many different complex stages. Therefore to produce a car you should split up the process and have workers specialise in producing a certain part. Specialisation requires less training of workers and a more efficient production process. However, if you have several distinct production processes it is most efficient to have a large output. At that point by expanding internationally, the number of firms’ customers is greater. Therefore the volume of products increases. In other words, the greater the volume of production, the lower the total cost. The Boston Consulting Group has shown that the doubling of output can reduce production costs up to 30%(Czinkota, Ronkainen, 1999). In 2006 the monopoly of the Royal Mail was ended by TNT which was opened up to competition. The TNTs’ dominant position was developed through organic growth with annual turnover of 750 million.
‘TNT employs 10,600 people in the UK & Ireland and operates more than 3,500 vehicles from over 70 locations. TNT Express Services delivers hundreds of thousands of consignments every week – in excess of 50 million items per year.’ (tnt website).
And finally let me take us closer to managerial urge motive which reflects the desire, drive and enthusiasm of management toward international business activities. The managerial commitment can be simply because managers want to be a part of company which exists on the international market. In this regard managers can often seek information abroad through international travel. Often, however the above reason is general entrepreneurial motivation which leads for growth and market expansion(Czinkota, Ronkainen, 1999,369).
The internationalization process may also be encouraged by the cultural socialization
of the managers. Managers who either were born or have the experience of living or
travelling abroad may be expected to be more internationally minded than other
managers. Prior occupation in exporting companies, or membership in trade and
professional associations, may also reinforce key decision makers’ perceptions and
evaluations of foreign environments.
As I mentioned at the top of the essay aside from proactive motives there are also push motives , primarily characterized as reactive. It refers to the compulsions of domestic market like saturations of market, which prompt companies to internationalize.
The main reactive reason is response to competitive pressure in the home country. Competitors are a relevant factor stimulating process of internationalization. Many governments use preferential tax treatment to encourage exports. Since 1960 the countries had severe competition in their countries. The countries which could not meet the competitions in the home country started entering the market of the developing countries. For example Coca-Cola became international much earlier than Pepsi did. However, Coca-Cola influenced Pepsi to move in the same direction. Moreover, the firm can enhance its competitive positioning by confronting competitors in international markets (Cavusgil, Knight, Riesenberger,???, 18) One example is Caterpillar’s defensive entry into Japan. The major competitors for this firm were Komatsu and Mitsubishi. The company of Komatsu was especially dangerous with their second position EME company worldwide in terms of their scale. To combat this danger Caterpillar decided to capture the Japanese market by joint venture with Mitsubishi.
Caterpillar Mitsubishi Ltd. started production in 1965, has been renamed Shin Caterpillar Mitsubishi Ltd., and is now the No. 2 maker of construction and mining equipment in Japan.
Overproduction may be considered as a major reactive motivation for international business activities. During the downturns, in the domestic business cycle, foreign markets may present more stable economic environment. If the domestic sales of a good are below expectation the record can be above required levels. The problem with this issue could be, and often is that, international market expansion motivated by overproduction may not represent full management commitment. This issue, therefore may not symbolize a long-term strategic perspective. Firms using this strategy typically are short-term oriented (Czinkota and
Excess capacity can be also powerful motivation. Hollensen (2007) argues that excess production capacity arises due to changing demand in the domestic market. If equipment
for production is not fully utilised firms may see expansion into the international
market as an ideal possibility for achieving broader distribution of fixed costs. Alternatively,
if all fixed costs are assigned to domestic production, the firm can penetrate
international markets with a pricing scheme that focuses mainly on variable costs(Czinkota, Ronkainen, 1998,360).
One of the last motivation for international business is saturated markets. This issue has similar effects to that of declining domestic sales. Firms may be pushed to go international because of a small domestic market potential. At that point firms can use the international market to extend the life of their product and their organisation. This sort of behaviour is often specific for industrial products that have small number of customers located over the world. It refers also to producers which produce specialise consumer goods with small domestic markets in many countries. Many US appliance and car manufacturers initially entered international markets
because of what they viewed as near-saturated domestic markets. US producers of
asbestos products found the domestic market legally closed to them, but because
some overseas markets had more lenient consumer protection laws they continued to
produce for overseas markets.
And finally a major reactive motivation for firms to go global is that proximity to international customers and ports. This type of motivation can also be named as physical and psychological distance. For example, a Polish firm established near the German border may not even perceive their market activities in this neighbouring country as global marketing. Unlike US firms, most European firms automatically become international marketers simply because their neighbours are so close.( (Czinkota and
Ronkainen 1998, 371)
Many organisations are expanding to foreign markets, however not all internationalization are successful. There are many cases where internationalisation was unsuccesful. To the chilean market it were Home Depot, Royal Ahold, Carrefour, and J.C. Penney(2005 Elsevier Inc.) When firms goes international, different things can happen to both risk and profit, which need be taken into account. Generally, firms that are most successful abroad are these motivated by proactive, internal factors. Many organisations are expanding to foreign markets, however not all internationalization are successful. And finally, firms need to take into account that becoming a multinational company requires a change of view and mind set (Björkman, 1990).
Internationalization enables them to access capital, technology, managerial talent , land and labor at better value at locations worldwide(Cavusgil, Knight, Riesenberger,???, 17)
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