4

INTER-NATIONALISATION

Contents

4.1 Introduction
4.2 Five forms of economic integration
4.3 International organisations
4.4 International management

After studying this chapter:

– you will have gained insight into the reasons and motivations behind
internationalisation;
– you will have gained knowledge of and insight into five forms of economic
integration;
– you will have familiarised yourself with the function and organisations of the
European Union;
– you will have familiarised yourself with the most important international
organisations;
– you will have familiarised yourself with a number of basic theories on
internationalisation;
– you will have gained knowledge of and insight into the motives for and forms of
outsourcing

START-UP

Tunga: websites and apps built by Africa’s youths

Programmers are a scarce resource, which start-up company Tunga has now found in
Africa. Tunga links companies to software-programmers and organisations looking to
have software built. Using support from organisations like Stichting DOEN, Dioraphte,
and Oxfam Novib, over the past 2.5 years, the company has built a network that employs
Africa’s youths as software programmers on international projects. This gives companies
access to the well-trained, affordable software programmers who are increasingly difficult
to come by in many western countries.

The start-up company, owned by Ernesto Spruyt (42) and Michiel Huisman (35), wants to
use this approach to contribute to the creation of a well-paid job structure for Africa’s
younger generation which, despite being well-trained, has barely any access to the labour
market. Tunga is a member of the Fairtrade Software Foundation.

Tunga focusses on SMEs as well as larger organisations and NGOs. The company’s
clients can be found on all continents, but it is focussed on the EU, where the Netherlands
is heavily represented. This is due, in part, to the entrepreneurs’ network, as well as the
country’s strong digital development.
Tunga offers its clients three options: implementing software projects, secondment of
software programmers (at a distance), or recruiting programmers. Projects and
secondment come in at 20 Euros per hour, which includes a margin for the start-up.
Recruitment is available for a fixed fee per candidate.

In addition to their own IT experience, the founders have a background in the hospitality
industry and in developmental aid. They say this is reflected in their work methods, with a
high level of service for clients on the one hand, and proper care for developers on the
other.
Source: www.sprout.nl, www.tunga.io, www.social-enterprise.nl
4.1 INTRODUCTION
Since its early days, the Netherlands has been an internationally oriented country. Consider
its Golden Age (1600–1700 AD), during which the Republic of the Seven United
Netherlands knew enormous prosperity. In those days, the Dutch government had founded
the East India Trading Company, usually known by its Dutch abbreviation VOC. Its ships
sailed and traded across the world’s seas and oceans, with a particular focus on gold and
spices. In the 20th century, internationalisation took off enormously following World War II.
More and more countries and companies began to join in the trade. International investments
grew, and many organisations went from nationally-oriented to multi-nationally-oriented,
with the borders dividing nations becoming increasingly meaningless. The development of
the internet has meant that this transformation has only grown in scale and speed. Online
stores like Amazon and Alibaba operate on a global scale.
Internationalisation
One aspect addressed in Section 4.4.4 is the relocation of activities to low-wage countries,
such as India, Vietnam, and China. This is known as outsourcing. Through collaborative
agreements, (parts of) business operations, such as IT, admin, and clothing, are transferred to
a low-wage country. The term ‘low-wage country’ is used for countries where production is
cheaper than in, for example, European or American countries, mainly due to the significant
difference in wage costs compared to Europe or the US.
Low-wage countries
From the perspective of the Netherlands, there are organisations that operate on a global
scale, with on the one hand organisations based in the Netherlands (with examples including
Unilever, AkzoNobel, Philips and Shell), and on the other hand foreign organisations
operating in the Netherlands (including Google, Cargill, IBM and Bank of Scotland).
Two concepts that are often mentioned with respect to internationalisation are import and
export.
Import
Reasons for companies and countries to engage in import are that:
– products are cheaper to produce abroad (for example due to lower wage costs);
– the product quality of foreign products is superior to that of domestic products;
– the imported products are not manufactured domestically.
Reasons for companies and countries to engage in export are that:
– they are looking to expand the market field, allowing for improved economies of scale and
competitive advantage;
– the product quality of domestic products is superior to that of foreign products;
– the domestic market is subject to overcapacity.
Export
These days, another frequently used term related to internationalisation is globalisation.
Whereas internationalisation is actually only concerned with products or services,
globalisation focusses less on those aspects but much more on a process of global economic,
political, and cultural integration between countries and continents. Not only the production
of goods and services plays a role in this process – other important aspects are the global
transfer and localisation of labour, knowledge, and capital. Countries and continents are still
connected on many fronts and partially depend on one another. Consider environmental
issues and counterterrorism efforts. Developments in information and communications
technology can only lead to even more expansive globalisation in years to come.
Globalisation

O&M IN PRACTICE

The world of robotics

 Employees in Dutch industries can look forward to new robot companions. Robot-density
in the Netherlands has grown by 65% – a much higher figure than in the rest of the world.
The only exception is China, which experienced an even greater robotic expansion.
According to the International Federation of Robotics, 294,000 robots were installed
worldwide in 2016 – of which around 100,000 were in the car industry and 90,000 in the
electronics sector. In 2020, the total number is expected to grow to 521,000.
Source: Het Financieele Dagblad, 23 May 2018

FIGURE THE WORLD OF ROBOTICS

Source: IFR/World Robotics 2017

Globalisation is related to the following themes:

– Trade: trade between the world’s nations is growing. Global trade also means a global
redistribution of labour.
– Transport: global transport of good and people is becoming increasingly aligned.
– International trade policy: more and more agreements on the nature of global trade are
being made between countries and continents on the government level. Consider policies
involving the size and scope of tax territories for import and export, and customs
legislation.
– International finance and capital flows: more and more agreements on the proper
monitoring and managing of cash flows are being made between countries and continents
at the government level. Consider interest restrictions and agreements in terms of bank or
insurance company buffers.
– International organisation of production of goods and services: organisations continue
to look for the most efficient and effective method of organisating of their global business
activities. Economies of scale play an important role, as do participations in strategic
alliances/networks, or participations in take-overs or mergers. This has a strengthening
effect on the connectedness of corporate life.
– Information and communications technology: developments in this field have made the
world ‘smaller and nearer’. Physical movement is often less necessary, and sharing of
knowledge has become much easier.
– Politics: globalisation has also had consequences on how countries and continents align
their legislation. Within Europe, countries have relinquished part of their sovereignty to a
higher body within the European Union, in order to improve the harmonisation of the rules
of the various member states and other parts of the world.
– Tourism: More and more of the world’s citizens are seeing travelling as a fine and useful
activity. Global travel is increasing. A special organisation within the UN is concerned
with global tourism: United Nations World Tourism Organisation (UNWTO). They gather
and analyse statistical information on global tourism. An example of one of their
overviews can be seen below:
FIGURE 4.1 DEVELOPMENT OF GLOBAL TOURISM
Source: Toerisme in perspectief, January 2018, NBTC Holland Marketing, Afdeling Market Insights, www.nbtc.nl/nl,
consulted 4 June 2018

This chapter pays attention to the five forms of economic integration that are possible
between countries. These five forms of economic integration encourage the mutual
internationalisation of countries. Internationalisation is also encouraged from an institutional
perspective. To that end, various international organisations, such as the United Nations,
have been established. The most important of these international organisations are covered in
a later paragraph, which is followed by a discussion of the organisational issues of
internationalisation, emphasising basic organisational forms and strategies.

4.2 FORMS OF ECONOMIC INTEGRATION

Based on its political responsibility, the Dutch government tries to direct the state of affairs
of the economy. For example, it may influence pricing, income distribution, the labour
market, the balance of payments, monetary issues, and economic growth.
In past years, there has been an increase in the amount of political power and influence that
can been exerted on national economies by outside bodies. Within Europe, this has partly
been brought about by the removal of borders between the Member States of the EU
(European Union), in line with their goal of creating a single common internal market.
The Unification of Europe and a shift in political power are factors likely to challenge
organisations in the near future. The only way of attaining true unification is by having
member states relinquish their national economic and political sovereignty to one or more
communal institutions the result is an economic union.
Unification of Europe
In general, five forms of economic integration can be identified. In ascending order of
intensity of integration, these are the free trade zone, the customs union, the common market,
the economic union and the complete political and economic union. All five are described
below in brief:

1 The free trade zone. Only the mutual trade restrictions (import and export rights) are
repealed by participating countries. Each country determines its own import tariffs for
products imported from outside the free trade zone. As a result, the trade policy for members
is not harmonised. A certificate of origin is therefore necessary to prevent products being
imported via the country with the lowest import tariffs.
Free trade zone
The advantages of the free trade zone are (Jethu-Ramsoedh & Hendrickx, 2015)
– efficient implementation of production factors;
– encouragement of competition;
– prevention of trade war;
– strengthening of trade and investment;
– encouragement of growth of prosperity.

Some of the world’s best known free trade zones are:

a European Free Trade Association (EFTA): Founded in 1960, EFTA encompasses the
countries of Iceland, Liechtenstein, Norway, and Switzerland;
b Mercosur: founded in 1991, the participating countries of this South-American free trade
zone are Argentina, Brazil, Paraguay, Uruguay, Venezuela and Bolivia;
c NAFTA: founded in 1994, its participating countries are Canada, Mexico and the US;
d ASEAN: founded in 1967, this alliance comprises Indonesia, Malaysia, Singapore,
Thailand, the Philippines, Vietnam, Brunei, Laos, Cambodia and Myanmar.

2 The customs union. A customs union also repeals mutual import and export rates. As a
result, there is free trade between participating countries, who also apply a common outside
tariff. The same import/export rate is applied to imports from non-participating countries.
Customs union
Examples of customs unions are:

a Swiss Toll Zone: Switzerland and Liechtenstein;

b Southern African Customs Union (SACU): founded in 1910, this customs union
comprises the countries of Botswana, Lesotho, Namibia, Swaziland and South-Africa.
SACU is one of the world’s oldest customs unions.

3 The common market. Also referred to as the internal market, the common market is based
on a customs union that has no economic interior border but applies one common exterior
border. In addition, there are no restrictions with respect to production factors. Within a
common market, there is free movement of goods, people, capital, and services.
Common market
To qualify as a free open market, countries need to remove a number (6) of restrictions,
including:
– physical limitations: customs checks, and associated paperwork and border crossing
delays;
– technical limitations: differences in product norm definitions, entrepreneurial rights
provisions, and government acquisition restrictions;
– fiscal limitations: differences in VAT and excise rates which require settlement at the
border.

A common market exists within the European Union. In addition, 19 of the 28 member states
also comprise an economic and monetary union. As discussed, ASEAN is currently a free
trade zone, but aims to become a common market in the future.

4 The economic and monetary union. An economic union with not just the characteristics
of a common market, but a harmonisation of monetary policy and its financial government
politics. This requires the implementation of central institutions, such as a single Central
Bank.
Economic and monetary union
5 The full political and economic union. A complete merger of countries. One example is
the formation of the United States of America.
Full political and economic union

A well-known example of a common market is the European Union, of which the

Netherlands is a member. The European Union (EU) comprised of 28 (or 27) countries. In
2016, the United Kingdom decided to leave the EU.
Countries in the EU enjoy free movement of goods, people, services, and capital. Within the
EU, these four freedoms are defined as follows:

1 Free movement of goods. Goods are no longer subjected to checks when crossing interior
EU borders; the EU comprises a single territory.
Free movement of goods
2 Free movement of people. EU residents can travel to other EU member states
unrestrictedly. This includes countries that are not EU members but are part of the
European Economic Area (EEA): Liechtenstein, Norway, and Iceland. The ‘new’ member
states are subject to a transition period. Independent entrepreneurs are also free to settle in
any of the member states.
Free movement of people
3 Free movement of services. All EU citizens are free to work where they want.
Restrictions apply to new member states.
Free movement of services
4 Free movement of capital. Free movement of capital offers European citizens countless
freedoms. The European Commission made a start on establishing a true European capital
market union. The goal of a capital union is to encourage cross-border investments within
Europe and to improve access for (small) companies.
Free movement of capital
The development of a common internal market has led to the formation of an economic block
at the European level, thereby possibly improving the competitive position compared to other
power blocks, such as Japan, the United States, and South-East Asia.
The unification of Europe will have significant consequences for many organisations. It is
anticipated that increased competition will put pressure on production costs, which in turn
will lead to a fall in prices. Lower prices generate increased turnover, which leads to
economies of scale, and possible business expansion. Larger scale production makes
innovation affordable, leading to better products which will more easily find their way to
consumers. Thus, there will be a chain reaction of reinforcing effects which will influence
Europe’s competitive position compared to countries like the United States, Japan, and
South-East Asia.

O&M IN PRACTICE

The Netherlands heading for the top of most competitive

countries, Germany lagging
A study by Swiss Business School IMD shows that the Netherlands does not particularly
excel in any field, in contrast to the US – which has excellent universities and is well
equipped to draw in research funds. However, the Netherlands is characterised by a
considerable and balanced performance across a wide front.
Source: Het Financieele Dagblad, 24 May 2018

FIGURE THE NETHERLANDS IN A CONVINCING FOURTH PLACE

 Source: FD, IMD

There are around 500 million people living in the European Union. China (1.4 billion) and
India (1.3 billion) are the only countries with more inhabitants. In addition to having many
residents, the EU also has significant economic power when viewed from a global
perspective. The EU accounts for approximately 25% of the world’s imports and exports.
Originally, the EU dealt with issues of trade and economy. This has since been expanded on,
with the EU currently also dealing with issues of freedom, security, civil rights, employment
opportunity, environmental safety, and consumer protection. The EU houses five common
institutions that sort out all affairs within its borders. These five institutions are:

1 The European Commission. On the one hand, the European Commission engages in
initiatives for (new) rules and legislation; on the other, it is concerned with supervising the
fact that relevant treaties are upheld by the EU. The European Commission ensures ‘daily
management’ of the EU. It is located in Brussels, Belgium.
The European Commission
2 The European Council. The European Council is responsible for the political decision-
making within the EU. Thus, the European Council determines the political development
 of the EU. In principle, all decisions need consensus. The European Council convenes in
Brussels at least twice per year. The European Council is the only body within the EU
authorised to sign or adjust treaties. The European Council is located in Strasbourg,
France.
The European Council
3 The Council of the European Union. Also known as ‘the Council’, this body is
concerned with legislation and budgeting, in tandem with the European Parliament. Every
proposed legislative or budgetary adjustment requires the Council’s consent. In addition to
these two important tasks, the Council also makes decisions with regard to foreign policy
and safety policy. The Council of the European Union is located in Brussels, Belgium, and
Luxembourg, Luxembourg.
The Council of the European Union
4 The European Parliament. Members of the European Parliament are elected directly by
residents of the 28 (or 27) EU member states every five years. The European Parliament
has 750 elected members, 26 of whom are from the Netherlands (2019). The European
Commission presents its proposals, which are the basis for debates held in Parliament. The
European Parliament eventually makes its decisions together with the Council of the
European Union. The European Parliament is located in Strasbourg, France; Brussels,
Belgium; and Luxembourg, Luxembourg.
The European Parliament
5 The European Court of Justice. The task of the Court is to ensure that the laws and rules
established in the EU are properly adhered to. The Court also passes judgement if member
states fail to follow, or even break, a law, rule, or obligation following from a treaty.
Another important aspect of the Court is that, within the European Union, its authority
outranks that of the individual member states. The European Court of Justice is located in
Luxembourg, Luxembourg.
The European Court of Justice
Within the European Union, currently 19 of the 28 (or 27) countries are participating in the
economic and monetary union (EMU). These 19 member countries use the Euro as their
currency (the Euro zone). Economic and financial politics are also coordinated within the
EMU. The 19 EU member states participating in the EMU have transferred their authorities
with regards to monetary issues to the European System of Central Banks (ESCB). At the
head of all of the Central Banks is the European Central Bank, located in Frankfurt am Main,
Germany. The objective of the EMU is to create a complete free common market with a
common currency and high price stability. In addition to the 19 EU member states, a number
of microstates and oversea territories use the Euro as legal tender. The countries using the
Euro as a currency are: Andorra; Belgium; Cyprus; Germany; Estonia; Finland; France;
Greece; Ireland; Italy; Latvia; Lithuania; Luxemburg; Malta; Monaco; the Netherlands;
Austria; Portugal; San Marino; Slovenia; Slovakia; Spain and Vatican City.
EMU

4.3 INTERNATIONAL ORGANISATIONS

Section 4.1 discussed internationalisation and globalisation. Various organisations have been
established in order to pave the way for these developments. To illustrate the nature of these
organisations, the most important ones are discussed below:

1 The United Nations (UN), including the World Bank and the International Monetary
Fund (IMF);
2 The World Trade Organisation (WTO);
3 The Organisation for Economic Collaboration and Development (OECD);
4 The World Economic Forum (WEF);
5 The BRICS countries and the New Development Bank (NDB) and Contingency
Reserve Arrangement (CRA).

United Nations (UN)

A nearly universally known organisation is the United Nations (UN). Founded in 1945 by 51
member countries, the UN currently encompasses all internationally recognised and
independent countries as its members. Within the US, the governments of the member states
collaborate in terms of international legislation, security, human rights, global economic
development, and the study of social and cultural development. The organisation’s
‘constitution’ is recorded in the ‘UN Charter’. The Charter documents the rights and
obligations of the member states, as well as the functions and procedures of the various
bodies within the UN. Another important UN declaration is the ‘Universal Declaration of
Human Rights’. Following World War Two, a great deal of attention was paid to
international human rights, which eventually led to the drafting of the aforementioned
declaration in 1948.
United Nations
The UN has established five core activities. These activities are:

1 maintaining international peace and safety;

2 developing friendly relationships founded on a respect for equal rights and the right of
 self-determination of peoples;
3 achieving international cooperation by solving global issues that are economic, social,
cultural, and humanitarian in their nature;
4 promoting respect for human rights and basic freedoms;
5 serving as a central point for peoples’ attempts to achieve and align common goals.

Financing for the UN is largely comprised of contributions made by its various member
states. The contributions encompass an assigned componenet and a voluntary component. Six
governing bodies operate within the UN. Well-known examples are the ‘General Assembly’,
the ‘Security Council’, and the ‘International Court’, located in The Hague, the Netherlands.
Since there are many different languages spoken by the countries of the UN, all formal
meetings and documents are in six languages: English, French, Russian, Spanish, Chinese,
and Arabic. There are various specialised organisations operating within the US. A selection
of these organisations is:
– International Atomic Energy Agency;
– International Civil Aviation Organisation;
– International Maritime Organisation;
– Food and Agriculture Organisation;
– World Bank;
– World Health Organisation;
– International Monetary Fund.

The UN pays a great deal of attention to sustainable business. To that end, the UN has
established a list of Sustainable Development Goals (2015–2030), which are discussed in
detail in Section 5.1.3.
Section 5.1.8 addresses an international collaborative alliance in the field of MVO: Global
Compact. Global Compact is a collaboration between the UN, companies, and other
stakeholders.
In the context of internationalisation, separate attention is paid to the IMF and the World
Bank.

World Bank
The World Bank is the world’s major institution for developmental collaboration.
It provides loans for developing countries and middle-income countries, with the most
important goal being the fight against poverty. The World Bank was founded during the
Bretton Woods Conference. The International Monetary Fund (IMF) was founded at the
same time. The World Bank and the IMF each have their specific objectives. Initially, the
goal of the World Bank was to encourage the reconstruction of Europe following World War
Two. Later, the World Bank shifted its focus to developing countries. The IMF’s goal is to
ensure monetary stability. The World Bank is comprised of two components: The
International Bank of Reconstruction and Development (IBRD), and the International
Development Association (IDA). Founded in 1944, the IBRD is the oldest of the two. It
focusses on creditworthy poor countries, which are offered a loan at more favourable
conditions than those offered by a commercial bank. The advantages of these loans generally
include lower interest rates and longer maturities.
World Bank

International Monetary Fund (IMF)

The International Monetary Fund (IMF) was founded at the same time as the World Bank.
The IMF currently has 189 member countries, all of whom participate in the IMF’s goal of
monitoring and promoting the stability of the international monetary and financial systems.
Therefore, the IMF has both an analytical and a strongly advisory task. The IMF also helps
member states to solve shortages on their balance of payments. A final notable function is the
fact that the IMF helps member states to prevent and resolve economic and financial crisis
situations. The IMF is provided with means and finances in two ways:
1 All member countries pay a sort of ‘membership fee’, based on each individual country’s
Gross Domestic Product (GDP) and its monetary and financial situation. Every five years,
the membership fee is re-established. The amount a country pays also determines the
weight of its vote: the higher the membership fee, the higher the weight of the country’s
vote.
2 The IMF is able and allowed to borrow funds from other channels.

O&M IN PRACTICE

Does the world feel safe?

The Dutch have a relatively high level of trust of the police, have little fear of going out at
night, and report few thefts.
Source: Het Financieele Dagblad, 14 June 2018

FIGURE HOW SAFE DOES DO THE WORLD’S NATIONS FEEL

 Source: FD, Gallup

World Trade Organisation.

Founded in 1995, the World Trade Organisation (WTO) is governed centrally from Geneva,
Switzerland. A governmental organisation, the WTO is a collaboration between countries
who have retained full sovereignty. The organisation has over 160 member states. The WTO
continued on the foundations laid by the General Agreement on Tariffs and Trade (GATT),
established in 1947. The task of the WTO is to promote global trade, resolve trade conflicts,
and remove trade barriers. The WTO strongly believes in international free trade, which the
organisation feels is the best way of improving global prosperity. The WTO cannot
implement rules itself; decisions can only be made if all member states agree. The member
states are therefore the ‘boss’ of the WTO. Meetings take place once every two years. This
meeting is known as a Ministerial Conference; it is intended as a way of arriving at new
legislation regarding any trade issues involving the member states. A consensus at this
conference results in legislation which all member states must implement. It is possible for
members of the WTO to take other members to court if the agreed upon rules are not
followed. The WTO uses several working groups to prepare for the biannual Ministerial
Conference; these groups include the Goods Council, the Services Council, and the
Intellectual Property Council. The requirement of unanimous decision-making makes the
WTO a cumbersome organisation; getting all member states on the same page can take years.
As a result, the formal meetings are generally complemented by various informal ones to
influence the decision-making – so-called backroom, corridor, or shadow meetings.
World Trade Organisation

Organisation for Economic Collaboration and Development (OECD)

Founded in 1948, the OECD is a collaboration between 35 European and non-European
countries. Originally focussed on the reconstruction of Europe following WWII, like the
World Bank, the OECD was then known as the ‘Organisation for European Economic
Cooperation’ (OEEC). The name was changed to OECD in the 1960s.
Organisation for Economic Collaboration and Development
In addition to the 35 collaborating countries, the OECD also has several partners (including
Russia, China, and India). All collaborating countries in the OECD are countries with a
market economy driven by democratic principles and respect for human rights. The OECD
was created to study and coordinate social and economic policy on the one hand, and to sole
common problems and align international policy on the other.
The objectives the OECD has set for itself are:
– stimulating sustainable economic growth;
– improving employment;
– improving living standards;
– safeguarding financial stability;
– supporting economic developments in other countries;
– contributing to the growth of global trade.

The most important body within the OECD is the ‘Council’. This council is comprised of
ministers from the collaborating countries, and permanent representatives. In addition to the
council, there is the ‘Executive Committee’. OECD decisions are made based on unanimous
agreement. Once a decision has been made, all collaborating countries are bound to uphold it.
The OECD is financed by the collaborating countries. In contrast to the World Bank and the
IMF, the OECD does not award loans to countries. The OECD has developed a ‘Better Life
Index’: a tool that offers an insight into the personal wellbeing of citizens of the various
countries. When measuring wellbeing, various factors are considered, including education,
income, milieu, housing, health, crime, balance between work/private life, and happiness. In
2017, the following countries made the top 10:
Better Life Index

TABLE 4.1 TOP TEN BETTER LIFE INDEX (2017)

Position Country
1 Norway
2 Denmark
3 Australia
4 Sweden
5 Canada
6 Switzerland
7 Iceland
8 USA
9 Finland
10 The Netherlands

World Economic Forum (WEF)

The World Economic Forum was founded in 1971. It is not a collaboration between
countries, like the UN, but a collaboration between various different parties. The best-known
WEF meeting is the annual one in Davos, Switzerland, where the chairpersons of the board
of directors are joined by presidents, heads of state, country ministers, journalists, and
intellectuals. The annual meeting in Davos addresses important global problems and issues.
As those in attendance are highly influential individuals, the WEF has a certain reputation
and influence.
World Economic Forum
Since the WEF is largely comprised of representatives of some of the world’s largest
enterprises, anti-globalists view it as a sort of business forum.
To change this image, the WEF has gone to even greater lengths than in earlier years to invite
a diverse group of attendees to their annual meeting. Scientists, media, young people, and
non-profit organisations are also welcome. The atmosphere of the annual meetings in Davos
is one of informality. The WEF’s results are in various fields, such as corruption, socially
responsible enterprising, and healthcare.

BRICS countries and the New Development Bank (NDB) and Contingent Reserve
Arrangement (CRA)
The five emerging economies of Brazil, Russia, India, China, and South-Africa founded their
own counterpart to the World Bank and the IMF in July 2014. The five emerging countries
feel that the World Bank and the IMF place too much importance on defending Western
interests (United States and Europe). In 2014, approximately 40% of the world’s population
lived in one of the five BRICS countries, with the five sharing over a quarter of the world’s
surface between them. The BRICS countries have elected to introduce two new initiatives:
– the New Development Bank (NDB);
– a Contingent Reserve Arrangement (CRA).
BRICS countries and the New Development Bank Contingent Reserve Arrangement

The New Development Bank (NDB)

The goal of the NDB is to offer resources to improve infrastructure and other projects, with
specific focus on the BRICS countries. The result should be a more balance global economic
order, emphasising the new economic centres of power. The NDB’s starting capital was 50
billion dollars. All five countries donated 10 billion dollars. The countries have not yet
offered any other guarantees for the coming years.

Contingent Reserve Arrangement (CRA)

The new CRA development bank aims to help countries experiencing financial difficulties,
for example in the form of the necessary support in case of issues with the balance of
payment. These countries, in turn, are made less dependent on other powers, such as the
United States and Europe. The CRA’s starting capital was 100 billion dollars, most of which
was donated by China. The CRA’s capital is also intended to increase over the coming years.

O&M IN PRACTICE

GDP – the costs of terrorism in the EU

Terrorism related costs across the European Union amount to approximately 179.8 billion
dollars over the period from 2014 to 2016. Three countries (the United Kingdom, France,
and Spain) have suffered for nearly 71% of total terrorism related costs.
Source: Het Financieele Dagblad, 13 June 2018

FIGURE GDP-COSTS OF TERRORISM IN THE EU

 Source: FD, European Parliament

4.4 INTERNATIONAL MANAGEMENT

Many theories have been developed as to why organisations or countries take part in
internationalisation. These theories can be subdivided into three group-theories (Hessels e.a.,
2005). These groups are:

1 Trade theories. Trade theories attempt to explain why international trade between
countries occurs. Well-known theories on this subject are the theory of absolute advantage,
the theory of comparative advantage, and the new trade theory.
Trade theories
2 Static theories. Static theories attempt to answer the question of why organisations engage
in international activities. It does not focus on why countries enter into trade, but why
 organisations produce and invest abroad. Examples of static theories are the theory of the
growth of the firm, the product life cycle approach, and the internalisation theory and
transaction cost approaches.
Static theories
3 Process theories. Process theories attempt to show how organisations take part in
internationalisation. Theories in this group are the most recent. Process theories view
internationalisation as a process. In other words: organisations that take part in
internationalisation proceed through a number of phases. Well-known theories that are part
of this group are the ‘stage model theory of internationalisation,’ the so-called ‘Born
Globals’, the ‘international new ventures’, and network models.
Process theories
This book uses process theories as a foundation, and discusses two important theories within
that group: the ‘stage model theory of internationalisation’ and ‘Born Globals’.

4.4.1 Stage model theory of internationalisation (Uppsala model)

Developed in the 1970, this theory is the result of studies by Swedish researchers Jan
Johanson and Jan-Erik Vahlne. They found that internationalisation (of Swedish
organisations) developed as a process during which organisations proceeded through a
number of stages, depending on the organisation’s available knowledge level and experience
with regards to internationalisation. According to this theory, internationalisation does not
take place in leaps and bounds, but by taking baby steps. Learn as you go! Depending on the
knowledge and experience available, the organisation selects the appropriate entry strategy.
An overview of this succession of entry strategies is as follows (see Figure 4.2):
Stage model theory of internationalization
FIGURE 4.2 OVERVIEW OF VARIOUS ENTRY STRATEGIES UNDER STAGE MODEL THEORY
Source: Ebbers, H. (2016), Internationale bedrijfskunde en globalisering, Groningen / Utrecht Noordhoff Uitgevers, p. 148

This figure shows that an improvement in market knowledge creates greater control over
international activity. This link is also evident from the entry strategy selected.
Export-oriented entry strategy
The organisation will initially opt for an export-oriented entry strategy, with a choice of
indirect or direct export. Indirect export means export is handled by the external party – for
example through the use of a trade agency, distributor, or trading firm.
Direct export is when, for example, the organisation chooses to establish its own export
department or foreign branch. The advantage of indirect export is decreased risk, which is
offset by a reduced development of market knowledge. The risks of direct export are greater
but, in contrast, it generates greater knowledge of internationalisation.
The next step is licensing or franchising. The income from these ventures is mostly in the
form of royalties. The risks in this phase are still limited. Through a strategic alliance, a
company can eventually arrive at a joint venture – generally a good entryway into local
culture. The logical sequel to a joint-venture is the take-over of or merger with a foreign
party. A merger or take-over means a directional investment. The organisation’s commitment
to international activity increases, as do its (market) knowledge and risks. Eventually, the
organisation may decide to construct their entire operation abroad, including R&D activities
– for example by setting up a plant without taking over another company. This final step is
known as ‘Greenfield’. The entry strategies mentioned are covered in greater detail in
Section 2.5.1 (forms and intensities of collaboration).
Licensing Franchising Merger Take-over
Looking at the different phases of internationalisation, studies have also shown that, in terms
of physical and cultural distance, organisations also shift their boundaries outwards. Initially,
an organisation may select a neighbouring country, or one that is close to it in physical and
cultural terms. At a later stage, it may move to outlying markets, whose cultural
characteristics are also different from those of the home country. This development is shown
in Figure 4.3:

FIGURE 4.3 Physical and Cultural Distance

Source: Ebbers, H. (2016), Internationale bedrijfskunde en globalisering, Groningen/Utrecht Noordhoff Uitgevers, p. 148

A 2016 study by the Dutch Chamber of Commerce (Kamer van Koophandel – KvK) shows
that entrepreneurs are driven by the following factors when considering international
business:
FIGURE 4.4 MOTIVATION OF ENTREPRENEURS FOR INTERNATIONALISATION
FIGURE 4.5 SELECTED FORM OF INTERNATIONALISATION

4.4.2 Born Globals

The previous paragraph indicated that organisations set on internationalisation go through the
process one small step at a time. This is supported by the KvK study (2016). However, there
are organisations that have an international orientation from the outset, skipping the
development phases. Such companies are called ‘Born Globals’. A Born Global can be
described as ‘a firm which, from its creation, strives for rapid internationality and is able to
globalise quickly without requiring a long period of trade on the domestic market or an
extended process of internationalisation’ (Hollensen, 2010). From the outset, these types of
companies already have a clear, international vision; their entrepreneurial activities are aimed
at other countries and continents from the start. Chetty, S. and Campbell-Hunt, C. (2004)
describe the most important characteristics of Born Global organisations:
– The domestic market has no relevance;
– The experience of the founding party/parties on international markets is extensive;
– International markets are developed simultaneously;
– The utilisation of technology is essential to success. Technology may refer to computer,
communications and/or transport technology;
– There is extensive and intensive collaboration with foreign partners, and the company is
part of alliances and network structures.
Born Globals
Examples of Dutch Born Globals are Booking.com, TomTom and WeTransfer. Well-known
US Born Globals are Google and taxi company Uber; from China, there is internet company
Alibaba.com. Born Globals are found in all economic sectors.

4.4.3 Basic forms of international organising

Enterprises involved in internationalisation should consider the organisation and alignment of
their activities. These considerations should be viewed in terms of a strategic angle. When
defining that strategic angle, two perspectives are of importance:
1 degree of local differentiation of activities (low or high);
2 degree of global integration of activities (low or high).

Combining these dimensions results in four combinations: basic forms of international

organising. These four basic forms are shown in Figure 4.6.
FIGURE 4.6 BASIC METHODS OF ORGANISING AN INTERNATIONAL BUSINESS
Source: FD

The multinational strategy was the popular choice in Europe for a long time. In this basic
form, the international business components are autonomous. This vision holds that each
country/region is unique and responsible for its own success, as well as the way in which it
arranges for its uniqueness and success to be given shape. The different countries/regions
therefore apply their own strategies. The different business components are responsible in
terms of operations and results. The function of the head office is mainly concerned with
coordination. From a practical perspective, this form of organising comes with its
disadvantages:
– relatively few possibilities for economies of scale;
– the emergence of ‘fiefdoms’ in the various countries/regions.
Multinational strategy
In practice, European companies are showing a strong tendency towards reconsidering their
multinational strategy and changing it into a transnational one. A transnational strategy is a
clear choice for the global integration of business components, allowing for global efficiency.
It also places greater emphasis on centralisation and control. European companies remain in
favour of striving for a high degree of local differentiation.
Transnational strategy
In other parts of the world, other choices are being made with regard to the basic form of
international organising. Japanese companies frequently choose a worldwide strategy, with a
central strategy implemented in all countries/regions. This results in a single strategy that
does not allow local differentiation.
Worldwide strategy
Lastly, US companies frequently opt for the international, central strategy. In contrast to
Japanese companies, local differences are possible.
International strategy

O&M IN PRACTICE

More Dutch citizens living abroad

International mobility among the Dutch is growing. The number of Dutch citizens living
abroad is relatively high compared to citizens of other West-European countries. Germans
are the most sedentary Europeans, with a share of only 1.0% of the population. The
United Kingdom, Belgium, and France also score lower than the Netherlands.
Source: Het Financieele Dagblad, 31 May 2018

FIGURE ACROSS THE BORDER

4.4.4 Outsourcing
Outsourcing may be considered a form of cooperation between organisations. As economies
of scale increase, more and more organisations reflect on their core tasks. As a result, certain
activities are divested of; others are outsourced to other organisations. Activities performed
by supporting departments in particular are being outsourced with greater frequency. The
resulting problem is that it creates high additional costs as well as making it hard to relate the
activities to the primary activities of the organisation that these supporting activities are
designed to benefit. An example of the outsourcing of supporting activities is the outsourcing
of part of the functions of HR and Financial Admin.
Outsourcing
Small to medium enterprises will also begin outsourcing part of their supporting activities
over the coming years, particularly in the field of specialised service provision. In general,
one may state that there is a (strong) increase with regards to the demand for organisation and
automation consultancy, catering services, research staff, and personnel training and
development.

Motives for outsourcing

‘Concentrate on your core activities and outsource what you can’ has been a prevailing
strategy for the past decades. But how far to take this principle? If everybody outsources
everything, nobody does anything. There is a necessary limit, but when will that be reached?
In the 1980s, it was mainly Michael Porter who, in his books on competitive strength,
discussed the notion that it is better to do a few activities very well. Since then, the focus on
one’s own core activities became a mainstay, and businesses began outsourcing more and
more. The results are well-known: an increasingly large share of the sales turnover arrives
through acquisition.
Core activities are not constant fixtures, but change over time, sometimes even very strongly.
A company that is too slow to adapt to changing circumstances and fails to define new core
activities may very well simply cease to exist! The maintenance of buildings, security,
catering, and health and safety are obviously not part of the core activities, and have been
outsourced by many companies.

The motives for outsourcing are often summarised using the four Cs:
1 Costs. If suppliers can provide the activities to be outsourced at lower costs, cost reduction
is possible.
2 Capital. Outsourcing can free up capital or retain it for investments in core activities.
3 Capability. Making use of the knowledge of suppliers is an important means of improving
quality.
4 Capacity. Being able to call on suppliers means the outsourcing company can respond to
 market fluctuations more flexibly.

An increase in knowledge and an advancement in technical development means

specialisation becomes the most frequent reason for outsourcing. Specialisation, of course, is
all to do with which core activities a businesses choose (not) to focus on. Thus, it becomes
possible to define the three goals of outsourcing:
1 flexibility: …the ability to respond flexibly to market fluctuations…
2 specialisation: …using optimised expertise and production techniques to achieve
maximum quality…
3 cost reduction: …while making sure costs are kept to a minimum.

Forms of outsourcing
Practical forms of outsourcing are varied. The following is a list of four frequently
encountered forms of outsourcing:
– Full outsourcing. All actions required for a certain activity are performed by an external
party. This is the most frequently seen form.
– Collaborative effort. The outsourcing company enters into an agreement with a supplier.
Together, the manufacture a service of product. The most frequently seen type of
collaboration is the joint venture.
– Assigning activities to specialised departments or separate companies. Certain
business processes are assigned to a separate department or company. An important caveat
is that the control of the activities must be retained. The separate department or company
may also choose to become a supplier for external parties, at which point it becomes
known as a ‘shared service centre’.
– Partial outsourcing. Some parts of the business processes are outsourced, whereas other
are performed internally. Proper alignment is crucial in this scenario.

Outsourcing and offshoring

The concepts of outsourcing and offshoring are often used interchangeably – and unjustly so.
Offshoring always refers to the transferring of activities across (national) borders.
Outsourcing relates to having others perform activities, either domestically or abroad.
‘Captive offshoring’ is when activities are currently performed by a company’s own staff, but
are intended to become or benefit cross-border practices (for example if a Dutch company
were to set up a call centre in India for Dutch clients). It is also possible to assign activities to
other (foreign) organisations (offshore outsourcing). Figure 4.7 indicates the differences
between the varieties of these concepts.
Offshoring
FIGURE 4.7 OFFSHORING AND OUTSOURCING
Source: Holland Management Review

Low wage countries

A frequently heard term in the context of offshore outsourcing is that of the ‘low wage
country’. The introduction to this chapter indicated that this term applies to countries where
production is cheaper than in many Western European or American countries. This is
because the wages in low wage countries are significantly lower. Relocating (part of) the
production process is an important facet in the development of globalisation. The concept of
the low wage country, however, is nothing new. Even in the 1960s, a large share of the Dutch
textiles industry was shifted to countries and regions such as Turkey or North Africa. When
wages in these countries went up, production was relocated to other, cheaper alternatives.

Goods and services

A large part of the traditional manufacturing industry has been relocated to low wage
countries. Examples are the clothing industry, the shoe industry, and the IT industry. Parts of
the automobile and aircraft industries are also outsourced to low wage countries. In a number
of cases, assembly still takes place in more expensive regions. The reason for this is the high
taxation on the import of finished products; by having assembly take place closer to home,
these costs can be prevented or minimised.
In addition to products, some services are also outsourced to low wage countries, like Dutch
call centres set up in Suriname or South Africa, due to the low language barriers between the
countries. The UK and USA have transferred many services to India, since a large part of the
Indian population speaks English and is qualified to do the work properly.
Examples of low wage countries are India, China, Thailand, Vietnam, the Philippines, and
Mexico. There are also low wage countries in Europe. In this context, relevant countries are
Poland, Romania, Bulgaria, Slovakia, and the Czech Republic; even though wages in these
countries are higher than those in East Asian countries, the transport costs from European
countries are lower, and there are no import duties within the European Union.
O&M IN PRACTICE

Dutch IT Outsourcing Study 2018

A Dutch study, part of the annual studies into IT-outsourcing, claims that the most
important reasons for Dutch organisations to choose outsourcing are: focussing on core
activities, improving quality of service, and reducing costs. Outsourcing companies are
generally satisfied with the quality of services offered by their suppliers, which has been
true for years. Targets are usually met. An important finding in the study is that companies
in the Netherlands are still very interested in outsourcing. 81% of companies participating
in the study confirms that they intended to continue to outsource at least the same amount
of IT activities. One in ten customers says they will be outsourcing less over the coming
two years.
Source: BoardroomIT, Strategic sourcing, commercial edition of ICT Media by Het Financieele Dagblad, May 2018

Social development and outsourcing

The relocating of goods and services to low wage countries is subject to great criticism. This
criticism involves two important factors: employment opportunities and labour conditions.
By shifting work to low wage countries, many employees in the more prosperous countries
lose their jobs, which cannot (all) be compensated for with jobs in other industries. Rising
unemployment is the result, as is higher government expenditure.
There is also criticism of the labour conditions and income generation in low wage countries.
Several initiatives have been developed in order to address and prevent these international
social issues. Examples are the Agreement on Sustainable Garment and Textile and the
Fairtrade seal.
The Agreement on Sustainable Garment and Textile means that companies that sign the
agreement (or covenant) agree to combat discrimination, child labour, and forced labour. In
addition, they encourage the right to free negotiations by independent unions, living wages,
and safe and healthy working conditions for employees. The goal is to have around 80% of
companies in the Dutch clothing and textiles industry sign the agreement by 2020.
The goal of the Fairtrade seal is to help farmers and labourers in developing countries to
improve their position on the international commercial chain, helping them to make their
work a source of living income while working on a sustainable future. In addition to a seal of
approval, Fairtrade is also a global movement. The Max Havelaar foundation in the
Netherlands is the owner of the Fairtrade seal. Well over 25,000 products with the Fairtrade
logo are sold in 30 countries worldwide, and over 1.5 million farmers are involved in the
initiative. (www.maxhavelaar.nl)
Summary

▶ Two important concepts in internationalisation are import and export.

▶ Globalisation refers not only to products or services, but rather a process of global
economic, political, and cultural integration between countries and continents.

▶ Globalisation and internationalisation intersect with the themes of trade, transport,

international trade policy, international finance and capital flows, international organising
of production of goods and services, information and communications technology,
politics, and tourism.

▶ There are five forms of economic integration. In ascending order of intensity of

integration, these are: the free trade zone, the customs union, the common market, the
economic and monetary union, and the full political and economic union.

▶ The European Union (EU) comprises 28 (or 27) member states; the European Monetary
Union (EMU) comprises 19 countries.

▶ Within the EU there is free movement of goods, services, people, and capital.

▶ The five common institutions of the EU are: The European Parliament, the European
Commission, The European Council, the Council of the European Union, and the
European Court of Justice.

▶ International organisations encouraging internationalisation are: The United Nations (UN)

including the World Bank and the International Monetary Fund (IMF), the World Trade
Organisation (WTO), the Organisation for Economic Collaboration and Development
(OECD), the World Economic Forum (WEF), and the BRICS countries with the New
Development Bank (NDB) and Contingency Reserve Arrangement (CRA).

▶ Theories on internationalisation fall into one of three theory groups: trade theories, static
theories, and process theories.

▶ The stage model theory says that internationalisation in organisations develops as a

process, through baby steps, depending on the available knowledge level and experience
with regard to internationalisation within the organisation. Depending on the phase of
internationalisation in which an organisation finds itself, it chooses an entry strategy.
▶ Entry strategies are export, licensing franchising, strategic alliance, joint venture, merger
or take-over, and greenfield.

▶ ‘Born Globals’ are organisations that strive for rapid internationalisation and globalisation
from the moment of their founding, without requiring a long period of trade on the
domestic market or a long process of internationalisation.

▶ Four basic forms of internationalisation strategy are: multinational, transnational, global,

and international.

▶ Outsourcing is when organisations have other organisations perform certain of their

activities.

▶ Motives for outsourcing are the four Cs: Costs, Capital, Capability, and Capacity.

▶ Goals of outsourcing are improving flexibility, specialisation, and cost reduction.

▶ Four forms of outsourcing are full outsourcing, collaborative effort, assigning activities to
a specialised department or company, and partial outsourcing.

▶ Offshoring always relates to relocating activities across (national) borders. Outsourcing

relates to having others perform activities, either domestically or abroad.

▶ A low wage country is a country whose wages are significantly lower.