Beruflich Dokumente
Kultur Dokumente
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Chapter One
The
Internationalization
Process*
Firms become international in scope for a variety of reasons: a desire for continued growth, an unsolicited foreign order, domestic market saturation, the potential
to exploit a new technological advantage, and so forth. The dominant reason, however, relates to performance. There is clear evidence that among the largest multinational enterprises (MNEs), a strong correlation exists between improved
performance and degree of internationalization (see Exhibit 1.1). Geographic
scope is positively associated with firm profitability, even when controlling for the
competing effect of the possession of proprietary assets. There is intrinsic value in
internationalization itself.
Internationalization is the process by which firms increase their awareness of
the influence of international activities on their future, and establish and conduct
transactions with firms from other countries. International transactions can influence a firms future in both direct and indirect ways. Business decisions made in
one country, regarding such things as foreign investments and partnership arrangements, can have significant impact on a firm in a different countryand vice
versa. The impact of such decisions may not be immediately and directly evident.
The development of an awareness and appreciation for the role of foreign competition becomes an integraland sometimes overlookedpart of the internationalization process.
Internationalization has both inward-looking and outward-looking dimensions.
The outward-looking perspective incorporates an awareness of the nature of competition in foreign markets, and includes the following modes of activities:
a. Exporting.
b. Acting as licensor to a foreign company.
EXHIBIT 1.1
High
MNE Performance
MNE Performance
and Degree of
Internationalization*
Low
0-20
20-40
40-60
60-80
80-100%
Degree of internationalization
(sales generated by foreign affiliates)
Profit to sales
Profit to assets
*Data are based on the 100 largest U.S. MNEs and the 100 largest European MNEs.
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c. Establishing joint ventures outside the home country with foreign companies.
d. Establishing or acquiring wholly owned businesses outside the home country.
These outward-oriented elements are similar to those in the stages model of international expansion. The stages model is an outward-looking perspective developed to
reflect the commonly observed pattern of increased commitment to international
business. In the stages model,1 a firm might progress from (a) indirect/ad hoc exportingperhaps from unsolicited export ordersto (b) active exporting and/or licensing to (c) active exporting, licensing, and joint equity investment in foreign
manufacture to (d) full-scale multinational marketing and production.
These are, of course, broad-based stages. In practice, there are many more subcategories. Within exporting, for example, firms may start with order-filling only.
Soon after, however, they may be confronted with questions of whether to use exporting middlemen who take ownership (distributors) or those who are commissioned agents; and whether to export directly (either through the firms own sales
force, an export department, or a foreign sales company) or indirectly (through brokers or export agents). From a service sector perspective, comparable issues exist,
such as whether to use management contracts or to develop in-house capability.
Similarly, if an investment is to be made, there are questions regarding scale of
investment (sales office, warehouse, packaging and assembly, or full-scale production), level of ownership (wholly, majority equity, equal, minority equity), and
type of partner. As Exhibit 1.2 illustrates, there are numerous variations on the
types of foreign direct investment possible.
Another way of considering the various forms of foreign investment (and there
are over 300,000 subsidiaries around the world) is illustrated in Exhibit 1.3. Each
of these four forms has merit, although generally greenfield and joint venture tend
to be superior performers versus acquisitions (because here there is a tendency to
pay too much and/or to have integration problems.)
The sequential approach in the stages model is intuitively appealing in that it
suggests that as firms develop experience and confidence with international business, they will be willing to increase the scale of their investment and commitment
in some sort of predictable fashion. The stages model also implies that over time,
the firms international operations will evolve toward modes such as wholly owned
subsidiaries that promise greater risk (due to the required scale of investment) with
the offsetting ability to exert greater control.
Not all firms follow such a path. Some start and stay with a particular mode or
some skip stages, while others even change modes to a direction opposite to that
suggested by the stages model. So while the stages model provides a useful way to
organize our discussion, it is by no means reflective of, or appropriate for, all
firms approaches to international business. It is a descriptive model. It reflects
what firms often do, not what they must or ought to do.
We also observe the formation of firms that, by necessity or design, are international at, or soon after, inception. These so-called born globals can take many
forms, depending on the number of countries involved and the number of value
chain activities that must be coordinated. (See Exhibit 1.4). Firms that are inter-
Warehousing
Scale of
investment
Packaging
and
assembly
Full-scale
production
Type of
partners
Wholly owned
(no partner)
MNE
partner
Private
local
partner
Local
government
partner
Local public
as partner
Majority
owned
Ownership
arrangement
Equal
ownership
Minority
owned
national from inception are often led by entrepreneurs who are able to overcome
not just the liabilities of newness and size, but the liability of being foreign. Many
firms do not originate with both international business competency and confidence. These firms, which are often SMEs (small and medium sized enterprises),
thus have added challenges as they engage in the internationalization process from
an entrepreneurial base.
Wholly
Owned
Existing
Business
Capital
Participation
Acquisition
New
Business
Joint
Venture
Greenfield
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EXHIBIT 1.4
Types of
International New
Ventures
Multinational Trader
ii
iii iv
Geographically
Focused Start-up
Global
Start-up
Few
Many
for making a foreign investment decades ago are different today (see Exhibit 1.5).
The nonstatic nature of the environment is simultaneously one of the greatest attractions and frustrations for the international manager.
In terms of the new entrant to international business, how do managers make
the decision to get involved internationally using any mode? Individual managers
and groups of managers often possess distinct attitudes toward international
business. These can range from being home-country oriented (ethnocentric),3 to
host-country oriented (polycentric), to world oriented (geocentric). There are two
major risks associated with an ethnocentric, or home-country, focus. The first of
EXHIBIT 1.5 Some Variables Influencing the Location of Value Added Activities by MNEs in the 1970s
and 1990s
Type of FDI
In the 1970s
In the 1990s
A. Resource
Seeking
B. Market
Seeking
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Type of FDI
In the 1970s
C. Efficiency
Seeking
D. Strategic Asset
Seeking
Source: John H. Dunning. Location and the Multinational Enterprise: A Neglected Factor? Journal of International Business Studies, Vol. 29, No. 1, p. 53,
1998.
these is a lack of awareness and appreciation for opportunities that exist external
to the domestic market. The counterpoint to these potential opportunities is the potential threat of foreign competition in the home market. Numerous businesses
have been hurt as a result of the naive view that if a product or service is NIH (notinvented-here), it wont be effective.
Relevant to all of the various perspectives and modes of involvement is the
firms need for methods of coming to grips with various international cultures.
Firms do not typically have the resources available to develop a detailed understanding of numerous cultures. Yet to compete internationally, some degree of understanding is required. But how much? And which cultures does it make more
sense to try to learn about?
There are still business people who persist in believing that international competition cannot affect them because they are too small, or because they are solely
focused on the local market. Foreign competition affects every sector of every
economy. Education is an important consideration at each stage of the internationalization process.
In the balance of this chapter, some of the issues we will deal with in the subsequent chapters and cases will be briefly considered.
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LICENSING
Our knowledge of international licensing is incomplete but growing. There are unresolved issues regarding the types of firms that license-out; the predominant industries that are involved; the revenues generated; the extent to which they consider
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alternative modes; the countries they license to; whether they tend to consider it a
stage in an internationalization process (or an end in itself); the costs of negotiating,
administering, and policing license agreements; the frequency with which they lose
proprietary advantages after licensing out; the most common terms in their license
agreements; the areas in which there is the most disagreement; and so forth. Despite
these limitations, we do know that firms license out their technology, trademarks, or
other proprietary advantages in order to generate additional profits. Further, we
know that licensing involves billions of dollars annually.
For the licensor, licensing is a chance to exploit its technology in markets that
are too small to justify larger investments or in markets that restrict imports or FDI,
or as a means of testing and developing a market. Firms are far more willing to license their peripheral technologies than their core technologies: no one wants to
create a future competitor.
For the licensee, there are two principal advantages of licensing. The first is that
it permits the acquisition of technology more cheaply than by internal development. Second, it allows the firm to acquire a technology that, when combined with
other skills already present, permits it to diversify. It is important for technology
buyers to (a) develop a minimum level of technical competence, (b) know their
needs, and (c) consider alternative modes such as JVs.6 This latter point is particularly relevant in the Cameron case.
While there are typically lower levels of commitment associated with a licensing strategy, there are nonetheless risks for both parties. For the licensor there are
the risks of losing a technological advantage, reputation, and potential profits (see
the Time Warner and the ORC Patents case). For the licensee, there are the risks
that the technology will not work as expected or will cost more to implement than
anticipated. Chapter 6 provides an introduction to the whole area of licensing.
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Exhibit 1.6). As the cases note, many firms often overlook the potential use of alternative cooperative approaches.
Chapter 7 considers why companies create joint ventures as well as providing
some guidelines for their successful design and management. This serves as a useful basis for the internationalization case study Nora-Sakari, which looks at a proposed alliance. While this and other cases such as GM and AvtoVAZ deal with
proposals, they differ significantly in terms of country, scale, alliance type, motives for formation, and partner choice. Other cases such as Euro Air consider the
challenges of managing within a nonequity alliance.
Before any investment occursjoint venture or otherwisethere is of course
a need to be clear why the investment is occurring, why the particular market is
being chosen, and whether now is the appropriate time (Exhibit 1.7). With these
and the mode question resolved, we can consider the issues which more typically
characterize the management of multinational enterprises.
Method of
Transfer
Unlimited
Whole range?
Internal to firm
Profits
Equity
Unlimited
Whole range?
Internal to firm
Equity
Unlimited
Whole range?
Internal to firm
Equity
Limited
5. Licensing
Nonequity
Internal to firm
changing to
market
Mixed**
6. Franchising
Nonequity
Limited by
contract
Limited by
contract
Whole range?
(for limited
period)
Limited range
Fraction of shares/
dividends
Fraction of shares/
dividends
Fraction of shares/
dividends
Limited
support
Market
Limited
Market
Small
Limited in time
Specified by
contract
Market
Market
Mixed
Equity or
Nonequity
Length of
Agreement
1. Wholly owned
foreign subsidiaries
2. Joint ventures
Equity
3. Foreign minority
holdings
4. Fade-out
agreements
Form of Cooperation
7. Management
contracts
8. Technical training
9. Turnkey ventures
10. Contractual
joint ventures
Nonequity
Nonequity
Nonequity
Nonequity
Limited by
contract
Limited
Limited
Limited
11. International
subcontracting**
12. Strategic buyersupplier coalitions**
Nonequity
Limited
Small
Market
Nonequity
Limited by
contract but
long-term
Limited
support
Mixed
Typical
Compensation
Method
Royalty as percent of
sales
Royalty as percent of
sales and markups on
components
Lump sum. Royalty.
Lump sum
Lump sum
Function of the change
in the costs and
revenues of the venture,
firm, or dominant partner
Markups
Markups. Respective
decreased costs/increased
revenues.
*Adapted from Peter J. Buckley and Mark Casson, The Economic Theory of the Multinational Enterprise (New York: St. Martins Press, 1985), except where
noted with double asterisk (**).
Derived primarily from F. Contractor and P. Lorange, Cooperative Strategies in International Business (Lexington, MA: D. C. Heath, 1988).
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Why
This
Market?
Why
Now?
versus trade
211 ma rkets!
key assumptions
ma rket v ersus
manuf actur ing base
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division, area division, global product division, and the transnational option. Each
structure represents a compromisean attempt to balance the inherent strengths and
weaknesses of the form chosen. Each structure must reconcile ease of administration
with customer responsiveness, and parent company versus subsidiary perspectives.
All of this must be done in the context of the sovereign concerns of different national
governments, and sometimes widely different cultures.
Some of the cases which allow for a more detailed consideration of organization issues include Quest Foods Asia Pacific and the CRM Initiative, Blue Ridge
Spain, and Meridian Magnesium.
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Conclusion
The chapters and cases that follow deal with issues of both internationalization and
ongoing multinational management. They are intended to help build an understanding of the impact of global competition; an appreciation for the various
modes of involvement; and a sensitivity to, and experience with, international
management.
Supplementary Reading
Anderson, O. On the Internationalization Process of Firms: A Critical
Analysis, Journal of International Business Studies, Vol. 24, No. 2, 1993.
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References