Internationalizing Firm International Strategy ByAdriana Calvelli Chiara Cannavale - 1

Adriana Calvelli · Chiara Cannavale
Internationalizing
Firms
International Strategy,
Trends and Challenges
Internationalizing Firms
Adriana Calvelli • Chiara Cannavale
Internationalizing
Firms
International Strategy, Trends and
Challenges
Adriana Calvelli Chiara Cannavale
Parthenope University of Naples Parthenope University of Naples
Napoli, Italy Napoli, Italy
ISBN 978-3-319-91550-0 ISBN 978-3-319-91551-7 (eBook)

https://doi.org/10.1007/978-3-319-91551-7
Library of Congress Control Number: 2018954346
© The Editor(s) (if applicable) and The Author(s) 2019

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Contents
1 Determinants of Internationalization 1
2 International Strategy 25
3 Market Entry Strategy 59
4 Outsourcing and Reshoring 111
5 Key Risks of Internationalization 129
6 The Role of Culture in Internationalization 165
Index 227
v
List of Figures
Fig. 1.1 The determinants of internationalization choices. Source: Our

elaboration13
Fig. 2.1 Internationalization strategies. Source: Our elaboration 28
Fig. 2.2 Systemic configurations of the organizations. Source: Our elab-
oration52
Fig. 4.1 Outsourcing risks and offshoring choice. Source: Our elabora-
tion119
Fig. 4.2 Share of European companies that have carried out reshoring
and back-reshoring: countries being abandoned. Source: Our
processing from European Reshoring Monitor—April 2018 123
Fig. 4.3 Reshoring and Back-reshoring of Italian companies: Countries
that leave. Source: Our processing from European Reshoring
Monitor—April 2018 123
vii
1
Determinants of Internationalization
an International Business Theories Interpret

C
Current Business Internationalization
Processes?
When analysing the theoretical contributions in the matter of International
Business and Management, it may be observed that these studies are
often strongly influenced both by their historic period and by the geo-
graphic origin of the analysed companies; they are, then, hard to general-
ize outside of a specific setting in space and time.
Before the 1970s, internationalization was considered as a fundamen-
tal phase in the evolutionary process of American companies, one that, in
sequential terms, was held to follow that of expansion on local markets
(Vernon 1966; Chandler 1962). The following underlying determinants
were identified:
–– The weak systemic connection in the oligopolistic structure of the US

market (Knickerbocker 1973), or the oligopolistic rivalry among com-
panies (Vernon 1966; Flowers 1976; Graham 1978).
–– The more contained labour costs abroad.
© The Author(s) 2019 1

A. Calvelli, C. Cannavale, Internationalizing Firms,
https://doi.org/10.1007/978-3-319-91551-7_1
2 A. Calvelli and C. Cannavale
–– The dollar’s continued appreciation against foreign currencies, typical

of the 1960s; this contributed towards deteriorating the exchange rates
and consequently encouraged United States companies to replace
exports—which were being countered by declining foreign demand—
with direct foreign investment.
–– The limited nature of the available technological and productive skills,
which led to choosing internationalization as an alternative to diversi-
fication on the domestic market. This was in order to better exploit the
knowledge and skills that were possessed, by applying them to similar
activities abroad instead of seeking to conquer new spaces through
diversification into activities unknown on the domestic market.
Chandler’s analyses show the sequential stages of development of large

United States multinationals: in the initial start-up and development
phases, organizations began to concentrate monetary and knowledge
resources in the “core” business and within the confines of the domestic
market; only after achieving a sustainable, long-lasting edge in the under-
taken businesses did the companies proceed—in successive stages and
with a view to international expansion—with correlated diversification
strategies and, lastly, with conglomerated diversification strategies.
Moreover, internationalization was considered a mandatory path; its
raison d’être lay in the managerial imperative of a growth often obliga-
tory when the produced goods were in a phase of maturity/saturation of
the domestic market. Internationalization could also be pursued to cope
with a situation of high risk levels connected with the company’s “weak”
position on the customers’ familiar market (excessively concentrated
market), or with the suppliers’ strong contractual power.
Therefore, internationalization for diversification was seen as the final
phase in a growth process on a corporate level, induced by the need to
invest surplus resources in value-generating activities.
Aimed at expanding business activities into new sectors or businesses,
this “portfolio perspective” had its start in the need to reinvest the sur-
pluses generated by cash cow activities in “stars” or “question/problem”
activities. From this standpoint, emphasis was placed on the objective of
optimizing the corporate portfolio of strategic business areas that, as is
Determinants of Internationalization 3
known, required investment in new areas of the surplus liquidity created

by mature businesses (self-produced financing), for which the company
enjoyed a high relative market position. Implicit in these statements is
the coverage of the financial risk that is higher when going into new busi-
nesses, and that may, for many authors, be accessible only to firms that
record levels of available capital for new investments.
Therefore, the determinants of internationalization took concrete
shape mainly in an optimization of the portfolio of the company’s activi-
ties, and therefore in advantages exclusively financial in nature. The strat-
egy generally aimed at investing excess liquidity in the needs required by
current investments, or targeted obtaining, from new investments, rates
of yield higher than those already achieved in the company.
By abandoning the “dogs”—activities discontinued by local operators
because they were considered no longer profitable—“supply voids” were
often generated,1 which were exploited by foreign companies to gain
entry into new markets. These are the determinants that led Japanese
companies to penetrate the American market while also confirming the
success of Japan’s incremental strategy. Entering into “supply voids” in
fact allowed Japanese firms to open a “window” onto the US market, and
to use it as a “springboard” for placing other home-country products
abroad. In fact, this type of entry helped lay the foundations for assimi-
lating knowledge of the US market, and for Japanese enterprises to take
on the character of “internal operator.”
Referring once again to the evolved development models, International
Business literature has its origins in economic models, which explained
the evolution of international trade and of foreign direct investment
(FDI), and in organizational theories, which interpreted the growth of
US multinationals during the 1960s. This current of study also includes
the theoretical contributions developed after the Second World War with
the intensified flows of FDI by Western and above all American
multinationals.
Emerging in the first place are the contributions that interpret interna-
tionalization as a process by phases, presenting a growing level of compa-
nies’ foreign involvement (Vernon 1966).
1
Situations where demand is not met due to insufficient or even non-existent supply.
According to Vernon, the company, by developing innovative tech-

nologies during the introduction phase, begins its process of expanding
on the domestic market as a “first comer.” Only after having acquired a
dominant position on the market, and when joined by a “second comer”
within domestic boundaries, does the company, following a market-
seeking logic, begin to export its output to target countries with a demand
gap. At least from the theoretical standpoint, exporting makes sense so
long as the sum of the transport costs plus the marginal production costs
are less than the average production cost in the markets being exported to.
The determinant underlying a process by phases is the reduction of
entropy risk, and companies’ choices to enter new markets are seen as the
result of the technology gap between the domestic market and the foreign
country, or as the attempt to cope—again by exploiting technology gap—
with the risks connected to the maturity phase of the “product life cycle.”
In the maturity/decline phases, technology is entirely mature, stan-
dardized, and perfectly accessible to local imitators, so the costs take on
primary importance for the company, as it is also forced to cope with the
imitative processes developed by local producers in host countries; look-
ing to economize, the company is more apt to delocalize production (by
means of FDI) to developing countries with lower labour costs.
The Vernon model was long the most well-known and generally
accepted model for interpreting FDI, and in fact it made a considerable
contribution towards understanding American companies’ international
growth processes. However, over time, the Vernon model’s explanatory
power gradually declined, as it was incapable of interpreting increased
FDI oriented towards destinations not always characterized by lower lev-
els of development, or of explaining the trend among companies to make
this investment while the product life cycle was in its development phase
(Calvelli 1998; Cannavale 2008), in order to prevent followers located in
the outlet markets from quickly appropriating the technology (even if it
is incorporated into production), or from producing the same goods at
lower costs (Rapp 1973).
Moreover, focusing attention on the current trends in the process of
companies’ internationalization towards emerging countries highlights
other interpretative limits of the Vernon model. In the first place, compa-
nies in the industrialized countries are rarely following a path of develop-
ment by phases that starts with exporting and ends with FDI. Among
other things, it is anachronistic to consider as modes of internationaliza-
tion only those of the competitive type, while relegating to residual
choices the collaborative-type modes that were more in use starting from
the 1990s.
In the second place, the international development model of SMEs,
the step-by-step “stage” model describing the transformation of SMEs
into MNCs in phases of sequential development, was refuted by later
research (including, among others, cf. Knight 2000), which showed
that some SMEs, such as those in the tech industry, were able to
quickly bypass the various phases of this “stage” model. Moreover,
many SMEs undertook the internationalization process with a “born
global” approach, seeking to seize global opportunities in an early
phase in their life cycle2; often, a “born global firm” launches itself on
foreign markets to exploit a global niche right from the start of its
activity.
One example of a “born global” company is the case of Lush Fresh
Handmade Cosmetics, a maker of natural, handmade beauty products that
are never tested on animals. Founded in Dorset, England, in 1995, the
brand opened its first North American location, in Vancouver, after
barely one year of existence, and immediately thereafter expanded with
factories and stores worldwide (Source: Data Base DISAQ).
As to the procedure for implementing internationalization choices, the
search to exploit lower-cost resources is not necessarily leading companies
to invest abroad, unless required to by regulations in the host countries;
most of the time, companies entrust their production to subcontractors
located in factor-rich countries.
2
“Born Global” approaches may also arise in small economies with a local market limited in size,
like Latvia. In this regard, research by Sauka and Auza (2013) analysed four Latvian case studies:
STENDERS, a producer of natural bath and cosmetics products; Munio Candela, a craft candle
maker; Primekss, a producer of industrial floors; and Trousers London, a maker of premium jeans
wear. The analysed companies’ common elements were a level of exporting amounting to approxi-
mately 70% of their total production, the absence of prior international commercial experience,
the development of a design aimed at satisfying international markets, the choice of “green” mar-
keting policies, and simultaneous entry into various markets in order to seize emerging
opportunities.
The same interpretative limits are also present in Hymer’s theory of

market power (Hymer 1960, 1976).3 For the author, the markets’ imper-
fections constitute the main source of the oligopolistic advantages of
companies—advantages that take substance in greater market shares and,
consequently, bigger profits.
For Hymer, FDI may more effectively grasp the market’s imperfections
since, in conditions of perfect competition, exports or the granting of
licences are preferable. Moreover, FDI is more advantageous than other
modes of implementing internationalization strategies, even when there
are trade limitations or highly unstable currencies.
Caves (1971) also picked up on Hymer’s approach, adding another
variable: the size of the investing company. To gain “ownership advan-
tages” on foreign markets, the company must be large in size, because it
must already have achieved suitable economies of scale on the domestic
market, it must be able to overcome barriers to entry onto foreign mar-
kets, and it must be able to withstand high risks.
The determinants proposed by Hymer present the same limitations as
the Vernon model as concerns interpreting modern companies’ interna-
tionalization processes. But Hymer’s model, by focusing attention only
on market-seeking orientations, underscores the limitations imposed by
failing to heed the factors (cultural, regulatory, competition-related) that
may hinder companies on the path of increasing their own market power
when the host countries are culturally distant from familiar ones.
The focus on the market’s imperfections is also a feature of internaliza-
tion theory, which plays a central role in the branch of studies on inter-
national business theory. Underpinning the theory developed by the
English researchers from the “Reading School” (Buckley and Casson
1976; Rugman 1981; Casson 1987; Hennart 1982) is the assumption
that MNCs pursue dimensional growth decisions implemented by creat-
ing internal markets (creating branches, creating own research centres,
etc.), when foreign markets (especially of the factors of labour, raw mate-
rials, etc.) are non-existent or imperfect. This is to say they present flaws
(costs due to dearth of information, or due to the presence of opportunism
3
Stephen Hymer’s thesis (Hymer 1960), published in 1976, is considered the seminal work for the
branch of studies on International Business.
and of “firm-specific” activities) that end up distorting the input prices

(in favour of the incoming companies). Multinationals, which possess
specific technological and market knowledge, achieve firm-specific
advantages and therefore enjoy a sort of protection in their internal mar-
kets. In this regard, for Hymer (1968), the FDI of productive activities
protects companies from competition and helps them maximize the
quasi-income arising from technological advantages and from the prod-
ucts’ differentiation.
The fundamental framework of the internalization theory is to be
found not only in Coase’s “institutionalist theory” on the process of
external/internal substitution but also in Williamson’s theory of transac-
tional costs (Williamson 1979, 1991), aimed at the quest for efficiency
(economizing). This also offers a methodological basis for determining
the transactions to be internalized in the hierarchy/market (or “make or
buy”) dichotomy: the company, as an economic and organizational struc-
ture, tends to prefer cooperative relationships within it (internalization)
over market relationships, to the point that the costs for internalizing an
additional transaction exceed the corresponding benefits.4
However, it bears noting in the first place that the internalization
approach completely neglects, among the factors determining the choices,
the greater costs that may arise from the need to coordinate and control
the decentralized activities. These costs may be greater or lesser depend-
ing on the distances between the market of origin and the destination
countries; the presence of nation-specific factors that may impede the
development of relationships with local players; and the presence of firm-
specific factors, such as the technological and managerial resources of the
parent company, which may be hard to transfer abroad.
In the second place, the conditions for business growth are induced
not only by the flaws in (or non-existence of ) “external” markets but also
by managers’ ability to succeed in promptly identifying flaws and
opportunities, so as to create “internal” markets that optimize growth
possibilities.
4
Transactional costs increase as the levels of limitation of the operators’ rationality rise, when deal-
ing with small numbers, a non-neutral atmosphere, and information asymmetry; this is the case
with the parent company’s technological and managerial resources, which can be hard to transfer
abroad.
Analysing such facts, it may in conclusion be stated that while all the
examined contributions have been able to explain the logical frameworks
of international development adopted by US multinationals—and of the
manufacturing sector alone—which in the 1960s–1970s were interna-
tionalizing prevalently in the European countries, they have not, how-
ever, been able to interpret the current international development
processes of Western companies and of companies in emerging areas
(China, South Korea, and India). They have also come up short in inter-
preting the internationalization processes of Japanese companies in the
1970s–1980s, which, although reduced in size and originating from
countries marked by a lower level of development than American ones,
were able to internationalize successfully—and specifically in the United
States.
Kojima (1978) and Ozawa (1979), in analysing Japanese companies’
first foreign development experiences, stressed that existing approaches
were unable to explain the internationalization of small-sized businesses
originating from countries that, like Japan in the 1970s, were disadvan-
taged in comparison with the destination country. For the authors,
Japanese FDI followed a trade-oriented logic (sale of their products),
unlike US FDI, and sought not to protect technological advantages but
to exploit the better conditions present in the destination countries, tak-
ing account of the host countries’ industrial policy conditions and pro-
pensity to accept foreign capital.
It must also be stressed that the examined contributions have some-
what neglected the effects induced by the internationalization of foreign
companies in the host countries: as knowledge, whether or not incorpo-
rated into the goods produced, is propagated, followers can become
active, metabolize, and implement the acquired knowledge, and become
competitors of the unwitting knowledge donors.5 It is an example of how
established knowledge development was in post-war Japanese companies.
By importing cars and products, acquiring technologies from foreign
operators, learning the organizational-management models of foreign
companies, and filling “supply voids,” Japanese companies metabolized
5
It bears noting, however, that the followers’ ability to become the donors’ competitors depends on
their ability to absorb new knowledge, and on their ability to develop autonomous learning
processes.
the acquired knowledge and implemented it in their organizations while

adapting it to local features; in some sectors, they became the original
donors’ competitors.
For China, too, during the past decade, the acquisition of new knowl-
edge—implemented through the importing of machines and licences, or
induced by the presence in the area of direct investment by US, Japanese,
and German multinationals—triggered an accelerated process of devel-
opment of the local economy.
Lastly, the examined theoretical contributions have focused attention
exclusively on the objective of achieving growth in new markets, or on
that of economizing, while neglecting the fact that companies can also
have the direct goal of acquiring new knowledge, notwithstanding the
underlying objective of broadening their markets and increasing their
profits at later times. In this regard, Parmentola’s research (2008) shows
that the determinants of the creation of research centres in the United
States, South Korea, and Sweden by Chinese producers of telecommuni-
cations systems, which are uncompetitive with foreign competitors oper-
ating in China, were to be linked to the objective of acquiring knowledge
and skills able to conquer a stronger competitive position than foreign
rivals could.
Therefore, internationalization, implemented through the creation of
“cognitive windows” in areas fertile for knowledge creation, may allow
companies to have full access to innovative resources, by learning and
exploiting positive externalities that are propagated locally.
oes Dunning’s Eclectic Paradigm Help

D
Interpret the Determinants for Entry
into Foreign Countries?
Dunning’s eclectic theory (Dunning and McQueen 1981) broadens the
motivations for internationalization set out by internalization theory,
considering not only market-seeking logic, or material and human
resource seeking logic induced by the markets’ flaws, but also the motiva-
tions connected to other location-specific factors and to the possibility of
being able to transfer firm-specific resources abroad.
According to the eclectic paradigm, the business’s internationaliza-

tion choices are based upon the simultaneous occurrence of three types
of advantages: ownership advantages, in which the company can count
on available human capital and knowledge, intangible specificities
related to the various functions, and activities in which the corporate
activity is expressed, such as marketing, organization, information pro-
cesses, governance, finance, and international experience; location
advantages, which derive chiefly from the country-specific differences as
concerns production factors (availability, quality, price), and with regard
to other aspects, such as infrastructure, transport and communication
costs, and tax, financial, and regulatory systems; and internalization
advantages, which lead companies to internalize exchanges in the pres-
ence of the markets’ flaws or failures. In this regard, Dunning has main-
tained that acquisitions, mergers, and alliances (of the “equity” type)
lead to reduced research and transaction costs, to more widespread
availability of raw materials and locally present components, and to
higher standards of quality.
Although Dunning’s model does not appear to propose a model that is
completely new in comparison to previous ones, but, rather, proposes a
systematization of the statements present in the pre-existing literature, it
is still worth noting, from the economic and corporate standpoint, that
Dunning’s eclectic paradigm emphasizes, for the first time in the contri-
butions on internationalization theory, a concept germane to strategic
analysis: the conjoining of the internal dimension of companies (owner-
ship advantages) with the external dimension (location advantages).
Despite this, eclectic theory is not without criticism, and for certain
authors (Grandinetti and Rullani 1996) the approach’s main weak point
lies precisely in its eclectic nature.
In the first place, eclectic theory, which limits the mode of entry to
FDI alone, does not provide for foreign investment when there is no
market failure; it is known, however, that companies may commit them-
selves to alliances to improve their competitive advantage or their com-
petitive position (Denekamp 1995).
Second, the paradigm justifies the choice of internationalization when
ownership advantages can be exploited, in imperfect markets where
location advantages can be achieved; however, another advantage that
should be achieved at the same time is ignored: advantages of cultural

compatibility.
The query is then posed: can the ownership advantages be fully exploited
and the potential location advantages fully enjoyed in markets culturally
different from familiar ones?
The exploitation of location advantages requires levels of acceptance,
by local communities, of products, technologies, and behavioural models
that constitute the ownership advantages of the entering companies, even
if distant from local ones. But, at times, the setting’s cultural dimensions
are loath to accept differences. The local setting may develop a kind of
aversion towards accepting products whose identity makes reference, in
the consumers’ perception, to habits and customs of culturally distant
countries.
Quite often, cultural compatibility is ignored when the decision to
undertake an internationalization process is made, and there are numer-
ous cases of failure of the undertaken initiatives. Emblematic of this is the
case of Yahoo!, forced by the hostile actions implemented by the Chinese
authorities to beat a retreat, ceding to Alibaba all the investments made
in China.
Last, the eclectic model ignores a company’s internal characteristics,
factors considered to be among the essential drivers of companies’ stra-
tegic behaviour (Zou and Tamer Cavusgil 1996). On the other hand,
the company’s abilities, which condition its performance and choices,
may in turn become sources of competitive advantage, thus triggering a
virtuous circle between strategic abilities and knowledge, between learn-
ing processes and the definition of the strategies and policies to be
pursued.
n Interpretative Framework from A Resource-

A
Based Perspective
The revisiting of theories from the resource-based standpoint highlights
the role of resources as determinants of strategy: they impact the choice
of the market to be entered, and influence the decision on the ways of
implementing the process.
Resourced-based theory6 considers the company as the source of com-

petitive advantage (Capron and Hulland 1999): competitive advantage
resides precisely in the resources (resources and capacities) available for
the company (Barney 1991; Peteraf 1993; Teece et al. 1997).
Adopting the RBV as the perspective for interpreting the determinants
of companies’ internationalization processes allows the strategy for enter-
ing foreign markets to be studied as a function of the objectives that
companies intend to pursue by seeking the right combination of resources
and skills: those already possessed, and those that may be developed or
exploited within the chosen target markets.
Scholars of the resource-based approach distinguish two determinants
of the internationalization processes: exploitation of possessed resources, and
the development of new resources. From this standpoint, resources may be
considered in the broadest sense, and also include knowledge resources
(Cannavale 2008).
The exploitation of possessed resources underlies the hypothesis that this
exploitation yields, for companies, positions of long-lasting advantage
over competitors.
In the development of new resources, the company tends to develop
innovative paths by exploring new resources and knowledge.
Based on the information mentioned earlier in the text, the determi-
nants of the internationalization of companies were analysed through
the study of multiple cases. This accords with Yin (1994, 2003), who
suggests this methodology when researchers are dealing with situations
where the number of variables greatly exceeds the number of observa-
tions, and when the objective of the research is to understand the causes
leading to a given phenomenon. Moreover, the multiple case approach,
as it possesses sufficient flexibility, is also recommended to reduce the
uncertainty inherent to situations where the boundaries between the
phenomenon to be examined and their context cannot be clearly defined
(Yin 1999).
6
On the resource-based view (RBV), cf. the pioneering works of Penrose (1959), Wernerfelt
(1984), Rumelt and Lamb (1984), Barney (1991); on the origins and implications for strategic
management, see, among others, the works by Barney and Arikan (2001), Rugman Peng (2001),
and Rugman and Verbeke (2002); a comprehensive review of the applications of the RBV may be
found in Barney et al. (2001).
Based on the information given earlier, the determinants of the inter-

nationalization of companies were analysed as a function of two dimen-
sions: a dimension inside the company, and a dimension outside it that
relates to the characteristics of the target market.
The internal dimension refers not only to the managers’ ability to have
material and knowledge resources, but above all to the ability to possess
“skills”; this means knowing how to combine the available resources in
such a way as to acquire greater strength, or less weakness, than the key
players with which the companies must grapple. The internal dimension
is represented by the level of competitiveness of the internationalizing
company, in comparison with the players operating on the domestic
market.
The model (Fig. 1.1) considered the competitive position of compa-
nies in the domestic market because empirical evidence has often shown
that companies’ choices in undertaking a given international path are a
conditioning factor.
Knowledge exploration International leadership

Presence of competitors in the target market
Market knowledge acquisition

Product/process innovation Own resource exploitation
High Best practice acquisition Host country's competition
control
Strengthening of the competitive
position
Protection of resources Resource seeking

Limited Local factor exploitation
or Imitation
Host market control
Absent Maintain relationships
Logistic cost saving
Market gap
Tax charges saving
Weak Strong
Competitive position of the company in the domestic market
Fig. 1.1 The determinants of internationalization choices. Source: Our

elaboration
The competitive position may be strong, in the case where the com-
pany has an edge over the competitors in the domestic market; weak, if
otherwise.
The level of competitiveness may depend on a variety of factors con-
nected with the type of sector in which the company operates. In high-
tech sectors, for example, the competition gap may result from the
possession of specific technological skills; in a mature, labour-intensive,
sector, such as textiles and apparel, the gap might instead be derived from
the brand’s renown, from the design of the models, or from the quality of
the fabrics.
The external dimension is represented by the presence in the target
market of competitors operating in the same sector. There are two possi-
ble situations: a strong presence of competitors contending at a level
higher than the internationalizing company; or no competitors, or a lim-
ited presence of competitors, contending at a level significantly lower
than that of the internationalizing company.
At the intersection between these two dimensions, the examination of
the cases of the internationalization of companies has led to identifying
four determinants of the internationalization of companies.
The knowledge exploration determinant regards the search for new
information and new alternatives, in order to improve future results, and
presents a position of weakness in comparison with the competitors
located on the domestic market.7 The company believes that entry into
the foreign market, where competitors possessing higher-level know-how
and knowledge are present, might be useful for
–– appropriating the knowledge of the competitors present in the target

market (market knowledge acquisition);
–– developing the knowledge needed to strengthen competitive position
in the domestic market or in the international one (strengthening of
competitive position);
7
Again with the intent of analysing the reasons leading a company to be located in a specific con-
text, some authors (Makino et al. 2002; Sauka and Auza 2013) have taken up the classification
proposed by March (1991) in the matter of organizational learning, distinguishing exploitation
from exploration of knowledge.
–– acquiring new resources and skills needed to innovate products and

processes, thus laying the groundwork for acquiring new advantages or
for expanding the business (product/process innovation); and
–– acquiring best practices that can improve management of the business
and the company’s organization (Best practice acquisition).
Knowledge Exploration: Some Empirical Evidence

Bitdefender, a Romanian cybersecurity and antivirus software company,
was founded in 2001. When they began production of the first Bitdefender
Box version, the manufacturing conditions did not exist in Romania, and
the main reason for offshoring was for the skills offered by the host coun-
try’s employees. But Romania has seen impressive change over the years,
and nowadays the company can find the skills it needs in the home country;
so it has therefore moved the production of its second-generation Box
device from China to a factory in Satu-Mare (Romania) although produc-
tion costs in Romania are 7% higher than in Asian countries.
Luxembourg-based Docler Holding is a multinational enterprise in the
fields of entertainment, technology, personal development, and luxury/life-
style, with more than 1000 employees worldwide. Docler Holding has
acquired Streamago from the Italian Telco giant Tiscali. The core engineer-
ing and business development activities are being established in
Luxembourg, and a branch has been opened in Sardinia in order to support
overall development. The reason for the acquisition is the Streamago’s spe-
cialization in social networks. In effect, Streamago is a social media plat-
form and community that allows its users to create and share live videos
and selfies publicly on Facebook, Twitter, Streamago itself, or privately on
WhatsApp and Messenger. It already counts more than 3.5 million regis-
tered users, 1.5 million monthly unique users, 130 million app launches, and
around 150,000 broadcasts per day. After the acquisition, Docler Holding
intends to pursue an international downsizing strategy: the company
wishes to relocate the main engineering and commercial development
activities from Italy to Luxembourg.
Source: Our adaptation from the European Reshoring Monitor—April
2018
The internationalization of Chinese companies on the Italian market
seems aimed at acquiring the knowledge and competence developed in
Italy (design, high-quality production, technological skills, the country of
origin’s image and brand reputation). Between 2008 and 2012, many Italian
brands were acquired by Chinese companies, such as:
(a) Tacchini Group, from Hembling International Holdings Limited, which

on 4 June 2007 became part of Tacchini H4T (Hembly for Tacchini), a
Chinese company controlled by Billy Ngok, the president of Hembly
International Holding Limited, one of the main Asian groups specialized

in the outsourcing and distribution of clothes, and listed on the Hong
Kong stock exchange. Tacchini was very close to bankruptcy, and the
acquisition saved the Sergio Tacchini brand, favoured by young people
who appreciate the Italian casual style. This acquisition is part of the
strategy aimed at competing in the segment of accessible luxury.
Source: Our adaptation from Il Sole24ore, 28 September 2007.
(b) Ferretti Group is a world leader in the design, construction and sale of
motor yachts and pleasure craft. The group owns prestigious, exclusive
brands including Ferretti Yachts, Riva, Pershing, Itama, Mochi Craft, CRN
and Custom Line. Internationalized in more than 80 countries, the
Ferretti Group was acquired by the Weichai Group, a player in the elec-
trical equipment sector, in 2012, with an investment of €374 million. The
aim was to combine industrial production efficiency with the unrivalled
quality and attention to detail of fine Italian craftsmanship, in order to
obtain a defendable competitive position.
Source: Our adaptation from Il Sole24ore, 10 April 2017.
The international leadership determinant regards the case where the com-
pany, which enjoys a high competitive position in the domestic market,
enters foreign markets in order to exploit the possessed resources and skills
(own resource exploitation), to try to reduce competition, and to develop a
position of leadership in the international market (host country’s competition
control). Many mergers and acquisitions were implemented precisely to
eliminate competitors and acquire a dominant position on the host market.
International Leadership: A Case Study

An international leadership logic was followed by the entry of Sonnen into
the United States, with the establishment of a branch, a development Centre,
and a pilot project involving 4000 dwellings, all networked with one another,
which autonomously generate, store, and exchange the electricity that is
produced. In fact, Sonnen, which makes smart energy storage systems for
private and commercial applications, already acquired some time ago a
strong competitive position not only on the domestic market, as it is a market
leader in lithium storage systems in Germany, but in Europe as well, with a
network boasting more than 9000 users and units sold. The SonnenBatterie
is distributed through SonnenBatterie Centres: medium- sized, structured
companies located in the United Kingdom, Luxembourg, Switzerland, Italy,
and Austria. A recent agreement with the Spanish company WeBatt Energia
calls for the purchase, in the first quarter of 2018, of a significant number of
SonnenBatterie units. In addition to the SonnenBatterie, Sonnen’s energy

services are also expanding in Europe, Malaysia, and the Philippines. Sonnen
has also created a Community, the world’s largest energy-sharing platform,
which provides electricity to users in Germany, Austria, Italy, the United
States, and Australia.
For creating the Community, and for its pilot project implemented in
Arizona to promote energy sharing, Sonnen was for the second time listed
by Fast Company among the world’s ten most innovative energy-sector
companies.
International leadership in the production of hangers is the case of
Mainetti, founded in 1961, which quickly transitioned from exclusive pro-
duction for Marzotto to becoming a leader in the domestic market; it now
supplies hangers to all the major domestic apparel manufacturers.
Since the 1970s, the company’s internationalization process has consoli-
dated, first in Europe and then worldwide, through the creation of its own
Mainetti product marketing and production units in the local markets (host
country competition control).
To reduce competition and therefore improve its position as world leader
in hangers, Mainetti purchased such competing groups as Pendy Plastic
Products, a Dutch hanger company, from Ferguson International Holdings
plc, with manufacturing bases in the Netherlands, Portugal, the United
Kingdom, and China. To conquer the American market, characterized by
the presence of fierce competitors, Mainetti purchased the powerful US
brands RANDY HANGERS, the world’s number-five player, and A&E, the
world’s number-two player (acquired from Tyco).
A dominant position was also acquired in developing countries and in
emerging countries (Sri Lanka, Malaysia, India, China [Shenzhen], Vietnam,
Bangladesh, Pakistan, Egypt, Turkey, and Morocco) by diminishing competi-
tion through purchases or joint ventures with leading local hanger makers.
Another example is offered by Lenovo.
Lenovo Group Ltd. is a leading global manufacturer of personal comput-
ers (PCs). The company was already the largest PC manufacturer in China
when it acquired IBM’s Personal Computing Division in 2005 and entered
the United States. Lenovo retained the right to the IBM brand for five years,
but worked quickly to publicize its own name in its new sales territories. A
restructuring followed Lenovo’s IBM purchase, which created the world’s
third-largest PC manufacturer after Dell and Hewlett-Packard. Lenovo relo-
cated its headquarters from Beijing to Purchase, New York, near IBM’s
home, while adding IBM’s ThinkCenter in Raleigh, North Carolina to several
manufacturing sites in China. Plans to relocate the headquarters to Raleigh
were announced in March 2006. In 2014, Lenovo acquired the mobile phone
handset maker Motorola Mobility from Google. Since 2013, Lenovo has
been the world’s largest personal computer vendor by unit sales.
Source: Our desk analysis
The protection of resources determinant highlights the case in which the

company is competitively weak in the domestic market, and enters mar-
kets where competitors are absent or possess comparatively lower levels of
skills and resources. It refers to the possibility that companies might wish,
through internationalization, to protect their tangible and intangible
resources.
In particular, the choice of entering a foreign market is often dictated
by the need to
–– imitate competitors, so as not to be at a disadvantage in terms of costs,

in the case in which one or more competitors, by internationalizing in
a given market, have reached higher efficiency levels (imitation);
–– follow their customer or supplier in order to defend the advantages of
the inter-organizational relationships that have been created (maintain
relationship); and
–– attack a market where companies can better exploit their own resources
due to the absence or limited presence of competitors with lower com-
petitive potential, also in cases in which demand is still latent (Market
gap).
Protection of Resources: A Case Study

During the 1990s, many Italian textile SMEs offshored their activities. For
companies producing à façon, competition from emerging economies was
becoming stronger and stronger, and the need to maintain relationships
with clients was one of the main reasons for internationalization. From the
perspective of protecting resources, these SMEs looked to offshoring as a
possibility to reduce production costs and preserve relationships with cli-
ents interested in keeping purchasing costs low. Many firms moved to
Tunisia, where industrial textile firms were established. This district is char-
acterized by many small Italian firms that have completely substituted
Italian activities with Tunisian ones, joined by large firms as well. Small firms
operate mostly with a view to protecting resources, by trying to keep clients
on the one hand, and to find a way to escape the disadvantages of little-
known or absent brands on the other.
Small South Korean manufacturing companies, which followed the large
companies from their own country that internationalized in regional clus-
ters in China, were motivated by a protection of resources logic. In fact,
small “follower” companies were able to more easily exploit access to raw
materials or to intermediate products, thereby also reducing the uncertainty

connected to entry into unfamiliar areas. This is in line with the results of
the research by Debaere et al. (2010), which show that geographical proxim-
ity can lead to technology or knowledge spillover. Moreover, the presence
of suppliers and customers in the same area may lead to building relation-
ships up and downstream, thus reducing procurement and sale costs.
Another example is offered by Maritan, a family-run shoe manufacturer
founded in 1995. After a few years, increasing competition and the pres-
sure to cut costs led the owners to move to Romania, following the 430
Italian SMEs already located there and operating in different but comple-
mentary industries. Some years later, the firm made another investment in
Moldavia. Thanks to these investments, the firm has saved its business, and
even improved it. Today, it produces for a host of major Italian brands, but
also sells products under its own label.
Lastly, the resource-seeking determinant highlights the case in which

the company is competitively strong in the domestic market and
decides to enter where the presence of competitors is lacking or lim-
ited. It bears noting that, from the resource-based perspective, resources
are considered in the broadest sense of the term, including not only
intangible and tangible resources (productive resources) but also those
that companies may acquire by exploiting the market potentials for
selling their output (market resources). The resource-seeking determinant
appears to reflect the case of companies entering uncompetitive mar-
kets, or markets in which competitors lack skills distinctive enough to
constitute a threat, precisely for the purpose of maximizing the benefits
that may stem from their competitive position, thus also creating, in
the foreign market, a market for their own output; this is the case of
small, high-tech companies that patent transgenic molecules and inter-
nationalize in strongly agricultural markets where the presence of agri-
food enterprises constitutes a potential demand for a product that,
although technologically advanced, still finds application in a tradi-
tional sector. This case would also include the internationalization pro-
cess of engineering companies or of engineering offices that decide to
enter Eastern European countries to exploit the advantages derived
from growing infrastructural demand and the lower preparation of
local technicians.
The following are some of the reasons that may underlie the choice of
internationalization: concentrating on exploiting country-specific factors
(local factor exploitation); selling own products/services on the target mar-
ket (host market control); reducing logistical costs; creating onsite centres for
stocking raw materials or finished products, if the target countries are closer
to the procurement or distribution markets (logistics cost savings); and
reducing tax burdens, by setting up associated companies or central offices
in target markets that offer more limited taxation (tax charges saving).
Resource Seeking: A Case Study

Safilo Group S.p.A. is an Italian company that designs, produces, and dis-
tributes prescription frames, sunglasses, sports eyewear, ski goggles, ski hel-
mets, and cycling helmets under its own five house brands and 22 licensed
brands (8108 employees). Their products are manufactured primarily in
three Italian facilities with an additional European plant in Slovenia. The
company’s internationalization in Slovenia, initially in family markets,
responds to a logic of economizing.
Adidas is a well-known German company specialized in sports footwear.
According to official data, the company employs more than 50,000 people
worldwide. Throughout the 1980s, large portions of the company’s produc-
tion was offshored to third-party external suppliers in China, where Adidas
now employs around one million workers. The determinant of internation-
alization was the exploitation of lower labour costs. One of the company’s
major competitors, Nike, recently decided to produce shoes using a robot-
ized system. Adidas has followed a similar strategy, bringing production
back from Asia, and opening its first robotized plant in Ansbach, Southern
Germany. The company also plans to establish a Speedfactory in the US in
2017. Bringing production back from China and Vietnam will help the com-
pany offset long shipping times and rising labour costs in Asia. It will also
help meet the demand for rapid innovation in designs and styles.
Source: Our adaptation from European Reshoring Monitor—April 2018
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2
International Strategy
A Key to Interpretation
The strategies of companies competing in an international setting have
given life to a current of studies that have, now and in the past, been see-
ing growing interest on the part of scholars in the economic and corpo-
rate disciplines.
In a complex and continuously evolving environmental system, and in
a landscape of markets that are increasingly contestable and thus more
exposed to the entry of potential competitors (and from other sectors of
the economy as well), a company’s competitive advantage depends in
large part not only on the strategic choices it makes in order to seize the
opportunities originating from the customers’ market or to defend itself
from the threats of competition but also on its managerial capacity to
create competitive and collaborative relationships with the suppliers of
factors and technologies. Success also depends on a company’s ability to
diminish, in assessments of potential entrants, the attractiveness of the
businesses by raising barriers to entry. This assumes a marked ability of
managers to abandon old paradigms and to replace them with new ones
able to create the conditions for the company’s strong interaction with its

https://doi.org/10.1007/978-3-319-91551-7_2
environment, aimed at generating, selecting, and governing the variance

of relationships (Lorenzoni 1990).
It is first necessary for managers to have a strategic vision of the actions
to be undertaken, and to be able to formulate strategies well defined in
their confines of space and time, with objectives consistent with the
quantity and quality of the resources present in the organization or that
can be acquired from the outside. A strategy, then, must be understood as
a decision-making model suitable for coordinating, in accordance with a
coherent, orderly vision, the company’s objectives, lines of behaviour, and
allocation of resources; it plays a role of mediation between the opportu-
nities and threats generated in the external environment, and the resources
and skills that are possessed.
Therefore, the strategy’s formulation must be based on two elements:
the strategic analysis of the environment from which the identification of
the business opportunities to be seized derives, and the managers’ ability
to use and combine the possessed or controllable resources and to acquire
the resources needed to pursue the strategic objectives.
Hence, in identifying the optimal relationships that companies
must implement with the forces of the competitive setting, the pos-
sessed knowledge and skills come into play; the more these skills com-
plement one another, and the more they cut across a company’s value
chain, the more the foundation is laid for a more lasting and defend-
able advantage.
From the perspective of an RBV, the role of resources and knowledge
in formulating strategies takes on a meaning different from that of previ-
ous currents of study. The strategy is not formulated to allocate resources
from a perspective of adapting to the market’s opportunities; its purpose
is to leverage current and potential resources to create competitive advan-
tages and opportunities for growth.
The earlier given statements, then, allow the defining confines of devel-
opment strategies to be identified: the theories and paradigms of dimen-
sional development strategies, which include internationalization strategy,
are aimed at defining the instruction (what to do, where to go), intensity
(levels of the targets to be reached), and direction (positive or negative) of the
companies’ growth vector.
International Strategy 27
The strategy’s formulation must allow managers to identify the possi-

ble markets based on the skills and knowledge required and possessed. In
a second phase in the strategic process, the examination of the rules of the
competitive game, which are characteristic of the chosen markets, can
guide managers in defining the policies to be followed and the modes of
entry to be implemented1 for the very success of the strategies to be
undertaken.
Logic dictates that it is necessary first to define the lines of strategy to
be pursued, and then to identify the procedures for implementing them
that can best reduce the times for putting strategies into practice, or that
can allow the strategic objectives to be achieved more efficiently.2
But clearly, in a unitary vision of the strategic process that must guide
the entrepreneur in pursuing his or her choices, internationalization
strategies and the procedures for implementing them are closely related
problems. Modes of entry condition the strategic decisions of interna-
tional development; this also derives from the consideration that, at
times, modes of entry cannot be chosen freely by managers, both because
they are imposed by foreign countries, and because they are subject to the
portfolio constraint of the corporate resources.
The interrelationship between strategies and modes necessarily leads to
circularity in the decision-making process, by which strategic choices are
monitored and assessed—through a path by “successive approxima-
tions”—on the basis of trialling one of the possible ways to implement
the strategies. The results of the experimentation are thus parameters for
assessing the ability to pursue, over time, strategic objectives determined
a priori.
1
The modes are more appropriately to be framed in the company’s organizational sphere, in that
they describe the logical frameworks guiding the choices on “how” to penetrate into a market,
depending on the comparative advantages that descend from these choices (collaborative or com-
petitive modes, mercantile internationalization, or direct investment or FDI, exporting or licens-
ing, “make or buy”).
2
Although it bears noting that often, the concepts that refer to internationalization strategies over-
lap with those describing their modes of implementation. In fact, certain studies and research
efforts on these issues have recurrently found that, in the intent to discuss paradigms and theories
of foreign development strategies, which is to say the models explaining the logic to be followed to
identify “what” is to be done, the scholars’ attention had instead concentrated on the modes for
implementing the strategies.
he Role of Core Factors in Development

T
Strategies
Following information given earlier, we can conclude that a potentially
winning formulation of the strategy must clearly be based on a careful
analysis of both the dynamics within the company, and of outside dynam-
ics, in order to identify the critical issues to be dealt with, the market/
product segments in which to operate and, above all, the best allocation
of possessed or acquired resources, whether tangible in nature or con-
nected with knowledge (knowledge resources).
Therefore, the expansion of the managers’ resources and skills enters
into play in strategic choices, and is often necessary for defining strategic
objectives. The more distant the rules of the game in the new environ-
ments being competed in are from those of the settings in which the
businesses already operate, the more this is perceived.
By focusing attention on the resources and skills possessed by the com-
pany that have been defined overall as “Core Factors,” and on the changes
in the wealth of Core Factors that must necessarily be generated when
this is required by the strategies to be implemented, a general picture of
the various internationalization strategies that companies may potentially
pursue can be provided (Fig. 2.1). The perspective pertains only to the
companies’ development strategies, since internationalization strategies
always presuppose the development—positive or negative—of the com-
panies’ size (organizational, productive, and financial).
Companies undertake internationalization strategies when they decide
to enter new markets for their output or for the acquisition of inputs,
Core Factor Development

Discontinuous Continuous
Positive sum growth International International

Diversification Expansion
International International
Negative sum growth
Re-focusing Downsizing
Zero sum growth
Fig. 2.1 Internationalization strategies. Source: Our elaboration

and to expand into already familiar foreign markets. Decisions that com-
panies formulate in order to reduce their foreign presence, to abandon
the foreign markets in which they operate, or to replace them with more
attractive markets, may also be considered internationalization choices.
In “expansion” processes, even if the business activities are developed
in familiar competitive settings, it is realistic to suppose that an increase
in management’s knowledge base may be achieved, both as the premise
for obtaining growth and as a natural development of the knowledge
moving in parallel with the company’s expansion path. However, it does
not appear necessary to suppose, in this case, an acquisition of new
knowledge resources aimed at transferring, to company management,
technological and market knowledge significantly different from that
already possessed. Lastly, the expansion strategy may require, in cases in
which the company continues to remain within the same competitive
setting, a mere reorganization of the already established wealth of knowl-
edge and skills, in order to achieve a greater use or more efficient and
effective exploitation of the available knowledge resources.
In the perspective of internationalization, the start of a process of for-
eign expansion into competitive settings that are familiar yet geographi-
cally different may be likened to an expansion into domestic settings (the
case of internationalization for expansion). This strategic type may be real-
istically supposed to include the choices of acquiring productive factors
on the foreign markets, and of offshoring production in foreign settings
that are not significantly distant from familiar ones.
The ITR Group: Case Study

The ITR Group is the union of three engineering companies, each operative
in a different European Country, but all linked by the same group of found-
ing professionals. Specifically, we are speaking of Italrom Inginerie
Internationala S.r.l. in Romania with its headquarter in Bucharest and the
first company founded; IRP Biuro Projektow Sp.zo.o., a Polish company with
its office in Warsaw and the third-youngest company; and MITES Ingegneria
Italiana S.r.l. in Naples, Italy. The Group was born in year 2008, in Romania,
from the union of professional experience in civil engineering, first devel-
oped by Italian professionals and then reinforced by the next generation of
engineers and architects from different European countries. The Chairman
of the ITR Group is Lorenzo Sabini, an engineer born in 1977, and the
founder and main owner of all three companies. His work, starting from
the first experience in Italy for collaborations with the consulting company
of his father Giuseppe, found great help in the collaboration of the engi-
neers Rosario Russo, Giovanni Voiro, and Giorgio Pedrazzi, all of whom are
partners and currently major professionals in key positions for the Group;
afterwards, collaborations with Romanians, Poles, and other Italians gave
Lorenzo Sabini the opportunity to organize and expand the activities.
The initial idea was to follow the civil engineering market in Eastern
Europe, in consideration of the opportunities provided by European Funds
and of the integration being implemented by the new countries. From the
beginning, the main objective was to create a multidisciplinary organization,
to carry out its services on the Europe market, and to specialize in the various
different fields of infrastructure, civil engineering and architecture, in addi-
tion to managing complex projects of environmental planning and the trans-
formation of constructed areas; this approach orients these professionals
towards sharing their Italian experience with other European colleagues.
Today, the Group is organized to provide professional engineering ser-
vices of any type and covering all sorts of projects in the civil domain, from
transportation infrastructures to hydro technical works; from civil buildings
to industrial ones; from the environment to energy. The company’s person-
nel, located in different countries, represent the stable presence of 40 enti-
ties, divided into engineers, architects, geologists, surveyors, designers, and
executives. The working staff, composed of senior and junior professionals,
provides a balanced mix of experience and innovation, and perfectly inte-
grates Italian experiences with Romanian and Polish ones. The technical
resources represent a large number of workstations deployed between
Italy, Romania, and Poland. The company has new and modern hardware,
and the finest international-level software. The working space is provided
by advanced video communication systems, and by the presence of central
servers with cloud and VPN technology.
The Group operates for public administrations and for private customers,
providing its own services in the following domains: transportation engi-
neering, structural engineering, geotechnical and geology, urban planning
and territory, architectural planning, and hydraulic engineering.
The group companies share some important agreements for research,
and collaboration with Italian, Romanian, and Polish universities in the field
of Civil Engineering.
Important results were achieved in 2017 by the companies ITALROM, IRP,
and MITES, in connection with the acquisition of new orders in the civil engi-
neering domain. Complying with the economic upturn in the construction
field in Romania, Poland, and Italy, the three companies achieved excellent
results in terms of acquiring new contracts by taking part in public tenders
and signing contracts with private companies. The hard work developed in
2017 yielded an important final result with acquisitions, in Joint Ventures,
for over €10 million. The most important clients are international construc-
tion companies, as well as, for example, Astaldi S.p.A., Salini-Impregilo S.p.A.,
FCC S.A., Max Bogl GMBH, and Collini Lavori S.p.A., public organizations as
well as the Romanian, Polish, and Italian road administration companies, the
Romanian and Italian railway administration companies, and the European
Bank for Reconstruction and Development (EBRD). For these clients, the ITR
Group companies signed a great many projects in the underground, metro,
highway and railway domains, and also for other designers and consultants
in the construction field.
What are your main strengths and which factors have led to your
success?
I can certainly say that I was lucky to find myself in the right place at the
right time; I am certainly proud of having looking for work opportunities
away from home when the trend towards internationalization was not
yet necessary and evident in the field of civil engineering. I say this
because our luck allowed us to get ahead of many others; with this advan-
tage, we have been able to make better use of our strong points which, I
believe, are:
–– the ability to adapt to local markets; this is typical of Italians, and of
Neapolitans in particular;
–– agility and speed in the choices to be made; this has been possible
because the founding partner professionals have always been directly
responsible, and play a key role in all our most important projects; and
–– flexibility in the use of human resources due to the fact that we can
work on different markets with the same team: in practice we can use
the same professionals on different jobs in different areas depending on
the projects to be completed, and not on their nationality/country.
What are the main problems you have faced in Romania and Poland, and
how have you solved them?
The Romanian and Polish markets are really quite different. In detail, I
can say that the Romanian and the Polish markets are opposite from one
another: in Romania, there is a lot of flexibility and a “Latin” approach to
the problem; in terms of work, this means a closeness to the Italian way, in
which the imagination to find solutions fits well with the interpretation of
the rules.
The Polish world, on the other hand, is very rigid: the rules leave little
room for interpretation and precision plays a key role. The language in
Poland is somewhat of a barrier for us Italians, while Romanian, since it is a
romance language, is more easily understood; this, too, is an important fac-
tor to keep in mind.
Our only weapon was to adapt to the country: for the language in
Romania, we studied and made it our own; in Poland we speak English and
leave the management of the interface with customers and colleagues. As
for rules, I can only say that it is obligatory to understand and adapt them
Did you have problems related to HR selection?

Fortunately, the Romanian and Polish markets have no shortage of labour
but, on the other side, this condition introduces some problems in recruit-
ing personnel. Moreover, this situation is characterized by another strong
complication related to personnel instability: often, in fact, people train for
months or years and then suddenly resign to change company; this causes
strong complications in our work organization.
Personally, our way of recruiting is to look for very young personnel
directly out of the universities and to give them professional training with
Italian designers and local senior people: this way of working brought some
complications at the start, but later, when fully operational, the system is
guaranteed to function well.
And what about linguistic barriers?
As I’ve already discussed, the Romanian language is close to Italian
because it is of Latin origin. Over time and with a few lessons, both my
Italian collaborators and I have learned to speak it.
The Polish language is very complex: it is of Slavic origin and is quite dif-
ficult to learn. Here, we continue to speak English and leave a lot of space
for Polish employees. Our local partner, Michal Rucinski, is the person who
helps us understand the most delicate speeches and items, because, besides
being a partner and a good friend, he speaks Italian very well.
How would you describe your competitive relationships?
This is a very important subject to discuss but I will try to be as short as
possible.
Today, to be inside the market for the acquisition of orders, four funda-
mental points must be considered:
1. Low costs
2. Marketing and public relations
3. Curriculum
4. Innovation
For Italians, in general, we say that the requirement (1) is difficult to sat-
isfy given the national situation in labour costs. Also, point (2), unless it is a
large-company it is difficult to prosecute, both for the costs of marketing
that would increase the management of the company, both for the fact
that, working abroad, it is always in an unfavourable position against local
and multinational companies.
As regards the curriculum and professional requirements, in this case as
well, competition in the globalized market is very difficult.
For this reason, from the beginning, in addition to exploiting our strong
points discussed earlier, we have always focused on the use of innovative
factors known in Italy that in some countries tend to be known later. On
this subject, in detail, it is important to stress that local companies in

Romania and Poland are already strongly organized for developing the
work with ordinary methods and, for this reason, only by exploiting the
most advanced technologies and know-how, can companies like ours man-
age to recover the ground that was lost due to the other subjects described
earlier in the text.
Source: Our interview
On the other hand, new core factors are need to place corporate out-
put into settings culturally distant from familiar ones, or into new mar-
kets having significant different competition rules derived from the joint
work of the five forces of competition. In these cases, the international
expansion strategy becomes, in an outlook of discontinuous positive sum
growth of the Core Factors, a diversification strategy (internationalization
for diversification).
The modes of implementation of internationalization strategies for diver-
sification include the choices of productive offshoring or the outsourcing
of production to international third parties when the foreign localization
market has cultural features and entrepreneurial behaviour significantly
different from familiar ones; in these cases, it is necessary for the com-
pany to acquire in-depth knowledge of the markets if it wishes to pursue
an objective of stability and efficiency of the activities that are undertak-
en.3 Many environmental factors, which are considered constant in the
domestic market, become variable, and companies may encounter cul-
tural, social, political, and economic differences that are so great that the
decision-making policies implemented within the habitual confines
become inapplicable and the very modes of acquiring information and
knowledge may also change significantly. Moreover, the sources of tech-
nological, organizational/managerial, and market knowledge expand in
cases where, upstream or down, the company’s production/distribution
cycle lengthens, and the strategic choice of internalizing new activities is,
3
Over the last decade, these problems have led Italian manufacturing companies to offshore pro-
duction to Romania, not only for its geographic proximity but also above all due to the reduced
language difficulties (Italian is widely spoken in that country) and for the inheritance from the past,
which is to say an aptitude Romanians have for working in industries on commission for foreign—
particularly Austrian—operators.
in the proposed interpretation key, included in the diversification

strategies.
International diversification can be concentric and conglomerate in
accordance with how new and different resources and skills acquired by
the company show synergies with the pre-existing resources and skills
(concentric diversification), or present no connection with them (conglom-
erate diversification).
International diversification strategy: An example

Founded by Carlo Stradi and Alberto Campanini in Parma in 1992, Custom
SpA is an Italian group involved in the production of cash machines, ticket
issuers, and bills, and had several companies abroad. The group has a large
international presence, obtained through a diversification into six main
markets: Boarding passes and bag tags, phones, smartphones and apps,
gaming, lottery and betting, PcPos & PCPos and cash registers, professional
devices for self-industries and ticketing, and entrance into very distant mar-
kets. Custom Group owns branch offices all around the world: five branches
in Europe (Germany, Russia, United Kingdom, Ireland, and Romania), eight
branches in Asia (Indonesia, India, Philippines, Thailand, Singapore, and
China), five branches in Oceania (Australia and New Zealand), two in South
America (Brazil and Argentina) and one in South Africa and one in the US.
Profits have grown considerably during the year, and Custom SpA is now a
leader in the production of integrated solutions for retail and professional
markets.
Internationalization for diversification is often motivated by the need to

monitor the behaviour of markets, productions, and sectors (opening of cog-
nitive windows), in order to seize the opportunities that may emerge locally.
The concept of “cognitive window” has been understood to include
the types of windows (creating related enterprises abroad, research cen-
tres, etc.) companies open in the areas of strategic relevance, in order to
learn the prevailing market mechanisms (market windows), or to learn
about and more easily appropriate, through continuous monitoring, the
innovative technologies being developed in given environments (techno-
logical windows). Moreover, since the process of broadening competitive
horizons is a given in modern business economies, completely abandoning
expansion beyond domestic borders reduces the ability to withstand the
market in cases where the demand for one’s products shows situations of
crisis, and yields fewer opportunities to be seized, due to “non-knowledge,”
should these opportunities arise on foreign markets. Conversely, manage-
rial responses can become more effective as available knowledge grows
with regard to the changes that are about to take place in the environ-
ment settings chosen for monitoring.
Opening cognitive windows thus means being present on the frontier of
knowledge, and acquiring the possibility to act before competitors do. In
this sense, internationalization might also be implemented to pursue a
“pre-emptive strategy” (MacMillan 1983)—as a move to stay a step ahead
of “potential” competitors—aimed at being the first entrant into a new
market for which the company supposes it possesses a capacity to meet
latent or unmet demand.
To acquire better competitive positions and undertake actions suitable
for change, it is necessary to learn, to acquire information, and to know
how to interpret it, especially when wishing to operate in international
settings. The thrust to international expansion of modern companies
originates precisely from the baggage of experience created through the
development of the knowledge process.
It may therefore be stated that in situations in which companies learn
through experience or through a process of relational exchange with actors
possessing different knowledge, which is to say almost by capturing the expe-
riences of others that provide learning opportunities, the foundations are laid
for a self-propelling process for generating and using knowledge. This pro-
cess instructs and directs the vector of companies’ international growth.
Going on to examine the zero or negative sum development processes
of the pre-existing core factors, in a strategy of “recentring”—carried out,
as is known, by eliminating business activities unattractive for the com-
pany or its market—it cannot be realistically supposed that a strategy of
this kind involves bringing into the company resources and skills that are
new and significantly different from pre-existing ones. However, to the
contrary, it is realistic to suppose that along with the discontinued busi-
nesses, the resources and skills connected to them are abandoned as well.
From the perspective of internationalization strategies, recentring is
implemented when companies abandon certain foreign markets in which
it is difficult to compete with the resources and skills possessed or that
may potentially be acquired, or are forced to abandon a market due to

hostile regulations in the host countries (these cases may be defined as
internationalization for recentring).
Since the late 1980s, we have witnessed, especially in the United States,
a revisitation of business strategies, aimed at “dismembering” the con-
glomerates and at reallocating the resources thus freed to the core activi-
ties: we have in fact seen manoeuvres of divestment and, often, of
investment at the same time in familiar or correlated activities. Major US
enterprises have thus substantially modified their development trajecto-
ries and, in recent decades, corporate demergers, implemented through
breakup or spin-off processes, have increased at a fast clip; this went
against the forecasts prevailing in the 1980s, which saw the recentring
strategy as an alternative more suited to smaller companies or, at most, to
new entrants into competition.
On the other hand, the organizational downsizing processes of US
companies are in many ways a natural consequence of the strategies of
excessive diversification carried out in years past. In this regard, it is
known that a development path without a unitary strategic design, or
projected towards the continuous search for the new, may be a hazardous
choice that can lead to the rise of diseconomies of coordination, distor-
tion effects in the resource allocation mechanism, non-reproducibility of
uncoded managerial skills concentrated in top management with a strong
entrepreneurial characterization (Cainarca and Mariotti 1985), and even
the business’s failure altogether.
The strategy of recentring or refocusing leads to concentrating the field
of action on the core, by liquidating both the activities that have no reason
to exist due to crises of demand or of inefficiency (pruning the dry branches),
and those not strictly related to the company’s central activities. In the first
case, treated more widely by the economic/business literature, the strategy
is aimed at resolving critical situations and, in this sense, is configured more
appropriately as a survival strategy. In the second case, a recentring strategy,
being aimed at refocusing management’s attention on the central activities,
over the long term speeds the growth process of strategic creativity.
Internationally, in recent years, international recentring strategies have
involved many companies that in previous years had undertaken interna-
tionalization strategies in potential outlet markets or in markets rich in
factors (cheap labour, raw materials): recentring in familiar markets or in
more attractive markets has often been imposed by hostile behaviour in

the host countries, by the emanation of conditioning legislation, or by
reduced advantages of cost.
International Downsizing Strategies. Some Empirical Evidence

Plasto AS is located in Åndalsnes (Norway). It delivers a wide range of plas-
tic products to many different industries, whose demands and requirements
are quite diverse. Considering price, technology, proximity to market, and
to improve its ability to develop new products and technology, Plasto AS
moved its total manufacturing activities from China back to Norway. Now
production is completely automated with robots, and production can run
24/7, says Lars Stenerud, the CEO of Plasto.
Kapsys is a French company founded in 2007 in Mougins, France. This com-
pany has become an expert in the fields of embedded intelligence and voice
technologies, designing and selling digital mobility and communication
devices for seniors and the visually impaired. Kapsys has decided to relocate
the production of its second-generation SmartVision mobile phone from
China to France due to problems of distance, transport, and, above all, qual-
ity. Since the production line was relocated, production activities have been
conducted by BMS Circuit—an electronics subcontractor based in Mouguerre
(Bayonne), France. Circuit hopes it can repeat the experience and produce
new smartphones for older people in France, and plans to do so in the sum-
mer of 2017. In addition, Kapsys attempts to protect the SmartVision 2 soft-
ware and avoid the risk of being copied or corrupted, as installation activities
would have been carried out by Kapsys itself rather than its service providers
in China. This strategy aims at higher control over design, development, and
manufacturing. Meanwhile, relocating production activities back to France
will facilitate communications between Kapsys and the production unit, and
offer customers more flexibility and responsiveness.
Dinbox is Sweden’s largest supplier of mailboxes. Its product portfolio
also includes other metal products like lockers, benches, and cloakroom fur-
nishings. In 2018, the company decided to move its total production activi-
ties back from China to its new plant outside Stockholm. The decision to
relocate was taken after purchasing an automated machine that produces
up to ten times more than any other one in the past.
I.P. Huse AS is located on the island of Harøy (Norway), and the company
has approximately 130 employees. It is the world leader in designing and
manufacturing large winches for anchor handling vessels (AHTS). According
to the project manager Håkon Heieraas, the company has moved total pro-
duction back to Norway from Ukraine, Poland, Russia, and the Czech
Republic. I.P. Huse has made large investments in production facilities in
Norway, to increase its production capacity. With mechanization and robot-
ics, the company had the opportunity to obtain benefits in terms of econ-
omy, quality, and lead time.
Source: Our elaboration from European Reshoring Monitor—April 2018
Lastly, if the strategies involve a discontinuous, negative or zero sum

increase of the core factor, this means that the company is implementing
re-focusing strategies that entail the company’s full-blown strategic repo-
sitioning. In this case and, generally, following situations of sectoral crisis
or of inability to compete profitably on certain markets, the company
abandons certain markets and replaces them with more attractive invest-
ment opportunities that require new resources, and above all knowledge
resources, in place of those related to the discontinued operations4 or to
the abandoned markets.
International Re-focusing Strategies: Some Empirical Evidence

Marklin is a German producer of toys, famous for producing locomotive
models. In recent years, the company has adopted a cost-saving strategy,
which involved offshoring and relocation to China. However, in 2015, the
company re-shored to China and invested in a plant in Gyor (Hungary) in
order to near-shore production.
Jabil is a US company founded in 1966 that designs and produces elec-
tronic components. In 2017, it decided to transfer some of its production
from China to Poland. More specifically, manufacturing activities were
moved entirely to the Kwidzyn plant, located in the Pomerania region
which is recognized as one of the most important Polish industrial cluster
for the electronic industry (20,000 people work there). Before relocation,
over 3000 people already worked in the Jabil plant, and further 600 ones
will be enrolled. New jobs will manage the relocated activities and the
increasing demand deriving from new customers.
The Neuman Aluminium Group, a medium-sized company, is specialized
in the development and production of high-quality aluminium parts. The
group—which is headquartered in Austria and wholly owned by CAG
Holding (Austria)—has manufacturing plants in ten locations in Europe,
North America, and Asia. CEO Christopher M. Braathen says that “initially,
the group was considering relocating production from China back to a low-
cost country in Europe. However, in the end the Austrian holding company
decided to locate production in Norway, considering Norwegian efficiency
and extensive use of automation as well as the local expertise available in
the industrial cluster of Raufoss”.
Source: Our elaboration from European Reshoring Monitor—April 2018
4
Consider, for example, the cases of productive reconversion induced by community restrictions
that have at times led companies in certain sectors (steel, agro-industrial) to crises of survival and
of radical strategic repositioning.
Thus analysed, the interaction between strategic choices and the wealth
of resources and skills is framed in a dynamic vision of the strategic action
of managers, and identifies the existence of a circular relationship between
two phenomena: the possessed core factors influence the company’s strat-
egy which, in its turn, tends to modify the accumulated wealth of core
factors. A virtuous circle thus takes shape, which feeds and increases the
strategic options available to the company.5 Therefore, from a dynamic
perspective, the strategic decisions thus adopted, through the environ-
mental filter that decodes and directs the company’s behaviour, may
impact future decisions.
Internationalization for Diversification:

The Risks of Extreme Diversification
Research on the theme of international diversification, which in the
1960s had concentrated on the theme of conglomerate development, has
focused attention in recent decades on concentric-type geographic diver-
sification, which is to say on situations in which the development of
business activities is carried out in the context of a relatively homoge-
neous cluster of countries. In cases of internationalization for diversifica-
tion, the companies that operate in relatively homogeneous clusters of
countries have, in statistical terms, more opportunities to achieve more
stable profits (Vachani 1990), by optimally exploiting their baggage of
knowledge.
In a strategy of internationalization for concentric diversification,
technological and market synergies are created: when the entrepreneur-
ial formula is replicated abroad, as Nike, for example, implemented
when progressively entering the various sport activities (basketball,
cycling, football, golf, etc.); when entering into new markets signifi-
cantly different from familiar ones, with existing products (technologi-
cal affinities); when activities in the value chain in “non-familiar” settings
are offshored.
5
As early as the 1980s, Itami (1987) stated that the knowledge possessed by the company acts both
as a constraint, by limiting operation in the short term and the strategic actions that may be
adopted, and as an opportunity, where knowledge—scientific, technological, and market—takes
on a pervasive nature and is used as a springboard for entering new businesses.
On this topic, Grant (1987) stated that multinationals operating in

psychologically close countries bear lower coordination costs and can also
draw benefits in terms of economies of scale and spillover (Daniels and
Radebaugh 1989).
Although in the early 1960s, Hymer (1960) had already stated that an
important role in the theory of multinationals was played by the compa-
nies’ ability to possess an oligopolistic wealth of intangible assets (owner-
ship advantage) that allowed them to compete in unfamiliar environments,6
only later research highlighted this assumption in a significant way. The
conclusions of the empirical analyses performed on the issue emphasize
the connection existing between the level of similarity of the clusters of
countries where multinationals operate and companies’ ability to use the
possessed wealth of invisible assets to their advantage.
For Teece (1986), physical proximity encourages affiliates to activate
mechanisms of exchange of technological knowledge that can more easily
be codified; in that way, companies can pursue the objective of achieving
higher levels of productive and commercial efficiency, through the econo-
mies of purpose that are obtained when new resources and skills are syn-
ergistically correlated with pre-existing ones.
Proximity, and above all cultural proximity, may also allow companies
to more easily standardize certain functional policies and activities, such
as those of marketing, and therefore to reduce the costs and complexity
of managerial operations (Buckley and Casson 1976; Ronen 1986).
Turning to examination of companies’ international growth processes,
from a perspective of conglomerate diversification, it is in the first place
to be noted that a strategy of this kind cannot guarantee, in and of itself,
the survival of companies on the market, and this is for two categories of
reasons.
In the first place, the managers’ knowledge needs increase with entry
into new markets, the more distant they are from the familiar ones. As
distance grows, the uncertainty perceived by the managers, and the com-
6
Hymer, in casting light on the motivations underlying companies’ decisions to expand abroad,
emphasizes the role played by possession of “ownership advantage,” which is to say of those advan-
tages over which the company wishes to maintain direct control in order to exploit them better.
These advantages, oligopolistic in nature, which permit the formation of additional profits to be
invested in international operations, derive from the knowledge the company possesses on its spe-
cific characteristics and on the sector in which it operates.
panies’ exposure to risk, grow as well. In this sense, uncertainty refers to

the managers’ ability to make conjectures as to the impact the actions to
be undertaken have on the companies’ performance; it depends on the
conditions of a country’s political stability, the higher (negative) fluctua-
tions that can characterize the area’s economic and social dynamics, and
the diversity of beliefs and values that can keep strategic objectives from
being achieved.
In the second place, high levels of uncertainty create a situation of
inertia in managers and accentuate the opportunistic purposes that, in
the long run, lead to the failure of policies, established a priori, of pene-
trating into markets. Numerous research works have been done on this
topic, focusing on the role that uncertainty can play in the failure (or in
the change) of the purposes that managers intend to pursue by establish-
ing a system of competitive or collaborative relationships with foreign
partners (Wernerfelt and Karnani 1987; Miller 1992, 1993).
It also bears noting that entry into markets considerably different from
familiar ones can generate the same danger as diversification in indepen-
dent businesses. In this regard, the reduced risk derived from fractioning
the overall company activity into a number of independent businesses
finds its limit in the greater risk generated with the entry into new activi-
ties for which no distinctive skills are possessed. This also takes place in
cases in which internationalization is carried out through mergers and
acquisitions, due to the uncertainty connected with the successful out-
come of the coordination to be implemented at the managerial level
among the bodies of the acquiring and acquired business units.
Other dangers emerge from an internationalization for diversification
when, for the management of new markets, the company decides not to
take on new human capital. For example, the greater attention required
in developing new activities may lead to removing existing resources from
established activities, making it more difficult to maintain the competi-
tive positions attained.
Nor, among other things, does the entry into the company of bearers
of new knowledge needed for development into new areas of business
ensure, in and of itself, their integration with the managers already pres-
ent (Vicari 1989). The conflicts generated by the clash of significantly
different skills may, in the long term, be reflected in the overall business
activities, thereby creating the premises for lowering performance levels,

even of already consolidated businesses (Calvelli 1995).
Moreover, a continuous expansion into non-familiar markets leads
necessarily to an increased number of exceptions that may be found in
performing the work, and to a greater effort in seeking solutions to prob-
lems that cannot be analysed, as they are connected to skills that are
found in the initial phase of the learning curve; this hinders routine
development and reduces management’s possibility of coordinating cor-
porate activities efficiently and effectively.
Lastly, diversification in countries culturally distant from familiar ones
requires an ability to grasp the weak signals on which light may be cast
only through careful analysis of the cultural characteristics of the host
countries, and of their impact on the behaviour of companies and of the
local authorities.
Some ICT firms left China due especially to hostile actions by the host
government; the case of Yahoo! is emblematic.
The Risks of International Diversification: The Hostilities of Host

Countries
Yahoo!, founded by some Stanford University students in 1994, is an
Internet services provider serving the business and consumer world. Known
mainly for its function as a search engine, it also offers market communica-
tion (mail, messenger, and chat) and media services.
The Beijing office originally handled Yahoo’s services in China, but after
the obstacles put in place by the Chinese authorities, Yahoo! was forced to
close down all operations, including the web portal, e-mail service, and
music streaming.
In 2005, Yahoo!’s local activities were transferred to the Chinese e-com-
merce giant Alibaba; however Yahoo! had purchased 40% of Alibaba for
US$1 billion. Relations between the two groups grew tense in 2010 when
Yahoo! lent its support to Google in its protests against censorship in China
and, in 2012, Yahoo! halved its stake, selling 20% (US$7.1 billion) to Alibaba.
In the meantime, the Beijing office had been converted into a research cen-
tre. Currently, Yahoo!’s decision is to close the Beijing office (350 employ-
ees), its only foothold in the country.
Even though, in Yahoo!’s telling, the closing is not linked to the hostilities
shown by the Chinese authorities but is aimed at “promoting greater cohe-
sion and improving the innovation processes in all our activities,” it may
realistically be stated that internationalization in China has never been
obstacle free.
The increasingly popular watchword in China is “wangluo zhuquan,” or

“cyber sovereignty”—a closer Internet monitoring achievable through the
creation of two new bodies: the Central Leading Group for Cybersecurity
and the State Internet Information Office. The former is charged with over-
seeing and developing “national strategies, development plans, and the
most important policies,” and the latter with transforming them into law
and enforcing them.
In addition, a new bill requires ICT firms operating in Chinese territory to
store user data on servers located within the People’s Republic of China,
and to guarantee the local government’s access to their software’s source
codes. Knowing a program’s source code allows all or part of an IT system’s
security procedures to be circumvented, and therefore makes it possible to
violate its memory and to access confidential data.
The formulation of all these new rules led the European Chamber of
Commerce to put out a press release stating that the People’s Republic is
slowly turning the “internet into an intranet.”
In brief, if foreign firms, and especially those from the United States, wish
to take advantage of the opportunities offered by the Chinese web, they
will, by necessity, have to comply with local law; otherwise, they will be
“forced” to abandon the market.
In this regard, in recent years, a great many foreign ICT companies other
than Yahoo! have left China or have announced they will be leaving the
market: Microsoft has announced the closure of two factories in the coun-
try (9000 employees); Adobe Systems has closed a research centre, and
Zynga, a specialist in games for social networks, has closed its office that
employed 71 people.
Conversely, Chinese ICT competitors are continuing to grow; at the end
of 2014, high growth levels were recorded by Bat, Baidu (search engine),
Alibaba (e-commerce), and Tencent.
Source: our elaboration from EconomyUp, Il Sole24ore, Yahoo!
Teknotherm has a history dating back to 1926 as a designer, contractor,
and manufacturer of high-quality refrigeration systems (Number of employ-
ees: 69 in 2014). The head office of Teknotherm is in Halden, Norway. The
strategy of this company is to be the preferred supplier of HVAC- and refrig-
eration systems for marine and offshore installations. On 26 November
2015, Dutch company Heinen & Hopman has bought 60% of the shares of
Teknotherm Marine AS. The deal includes the subsidiary companies in
China, Poland, Turkey, Sweden, and Tromsø, Norway. The internationaliza-
tion in China has pursued the objective of reducing costs. In 2016,
Teknotherm has decided to relocate the production of electronic compo-
nents for refrigerated seawater systems from China to Halden, Norway. The
relocation decision is made based on an assessment of costs, quality,
exchange, delivery, and more efficient production in Norway.
Iccab is an Italian apparel company (with 300 employees), well known for
manufacturing the “Marina Militare” (Italian Navy) brand. The company is
outsourcing production to third-party Chinese suppliers to reduce costs, but

Panerai, the company’s owner, stated that changes in the dollar/euro
exchange rate have created extra costs for imports from China. Other rea-
sons for the repatriation included the high quality of production in Italian
industrial districts, and loyalty to the home country.
In 2013, as little as 20% of production for the luxury French jewellery
producer Mauboussin (350 employees) was carried out in European coun-
tries. The majority was outsourced to producers in China, India, and
Thailand. The offshoring governance mode was third party—external sup-
pliers. However, since 2016, following several rounds of backshoring and
nearshoring (to Italy), almost 85% of production for the company has been
done in Europe, and more than 40% in France. Moreover, the share of pro-
duction in France is expected to increase to 50% by the end of the year.
Alain Nemarq, the company’s chairman, stated that producing company
goods in Europe is approximately 10% more expensive than in Asia.
However, higher costs are offset through benefits in terms of product qual-
ity, less time lost in logistics, company image, and country of origin image.
New labs have been set up in Paris, Lyon, and Alsace, as well as in Italy.
Although the quality of Mauboussin’s products has not increased as much
as expected, time lost in logistics has been greatly reduced.
Broadnet Telecom Inc. is Norwegian wireless and fibre-optics solutions
company, with 360 employees. The company’s mission is to deliver world-
class products, services, and systems to customers in three major markets:
Mobile Networks, Enterprise Networks, and Government Communications.
Broadnet outsourced maintenance tasks of the Norwegian emergency com-
munications network to the Indian IT services provider Tech Mahindra.
However, Broadnet discovered that Tech Mahindra had more extensive
access to the Norwegian emergency network than had been foreseen, and
because of this issue, it decided to move the entire operations of the emer-
gency network and maintenance of the infrastructure back to Norway.
The advantages inherent to the processes of internationalization for

diversification, in culturally distant competitive settings, have, based on
the failures seen in the past, led to privileging development strategies in
markets close to domestic ones, aimed at seeking the synergistic advan-
tage that derives from being able to transfer the knowledge and skills
already acquired to new competitive settings. It follows, then, that
development towards activities that companies know how to handle can
become one of the fundamental requirements for achieving business
excellence.
Also underlying the experimental studies by Rumelt (1974), albeit in

“soft” form, is the concept that diversification leads to comparatively
higher performance if the areas of business in which the company diversi-
fies present activities correlated with one another in terms of destination
towards similar markets and use of the same distribution systems, employ-
ment of related technologies, or development of analogous research
activities.
Analysing the given information, it may be stated, in keeping with the
thought of certain authors (Copeland et al. 1991), that the search for
activities and markets to enter may be considered as the search for activi-
ties that can create added value, which is to say activities able to make a
strong contribution towards creating value for the company.
Standardization Versus Adaptation

On the macroeconomic level, globalization is understood as the intercon-
nection between markets, and interpreted as a process of economic, polit-
ical, and cultural convergence among countries. But on the
micro-economic level, the authors focused their attention on studying
global strategies. Therefore, the issue to be discussed here is whether glo-
balization is a new paradigm of internationalization strategies, or a new
way for companies to organize structures and resources to obtain more
advantageous competitive positions on international markets—which is
to say a new way to define the policies for implementing international
strategies.
The strategies of companies competing in a global perspective have
given life to numerous currents of study that, now and in the past, have
been receiving growing attention on the part of scholars in the economic
and corporate disciplines. Despite the wide range of theoretical and
empirical works done on this issue, there is no simple reference to para-
digms able to provide univocal and non-ambiguous interpretations.
The concept of global strategy established in the literature (Porter
1996; Bartlett and Goshal 1989, 1998), called “pure” by Rugman and
Hodgetts (2001), presents both a high economic integration between the
activities large international enterprises carry out in the various settings
and companies’ low level of interaction with the specific local environ-
mental conditions.
It emerges from this conceptual model that companies’ international
development strategies take on global scope when the “modes of imple-
mentation” are aimed at achieving two objectives:
–– The homogenization of the value chain activities deployed in different

settings, which assumes the international transferability of managerial
practices and behaviours, and the existence of a uniformity of lifestyles
and consumption models
–– Centralized coordination of the activities along the nodes in the inter-
national supply chain, which assumes the search for a spatial specifica-
tion of activities, aimed at seizing the comparative location-specific
advantages
However, the objective of homogenization, in which global strategy

focuses more on processes, products, models of behaviour, and manage-
rial practices to be standardized, supposes the existence of an abstract and
to a certain extent utopian world without those regulatory, cultural, and
socioeconomic barriers that actually create non-uniformity and different
levels of acceptance of diversities. The levels of acceptance by local com-
munities of significantly different behavioural models, beliefs, and values
may be lower; locally, a sort of aversion may arise towards accepting prod-
ucts whose identity, in the consumers’ perception, calls to mind the cus-
toms and habits of psychologically distant countries.
The ethnocentric hypothesis—which in the past had led large compa-
nies, especially those in the United States, to believe that managerial
activity could be based on universally valid principles and that managerial
practices could be successfully exported to economies in different set-
tings—has been critically revisited in more recent years: specific local
conditions have required increasingly differentiated managerial styles,
mechanisms for governing business activities, and products.
The existence of a universal product has also been much debated in the
economic and corporate literature, and the results arrived at for the most
part reject it. Although modern reality is marked by a broad mobility of
individuals and a wide international spread of knowledge, there are needs,
customs, and lifestyles linked to history and to established practice, not

only of individual countries but also of individual territorial areas in the
same nation, that have such deep local roots that they are difficult to
change; they are integral parts of the cultures and traditions that still dif-
ferentiate societies and individuals in spite of globalization.
The universal product therefore appears to be configured as a “simplis-
tic and illusory image of the globalization process, as a ‘myth destined to
survive only for a brief season’” (Grandinetti and Rullani 1996).
It is thus not the trend towards globalization, in and of itself, that gen-
erates uniformity of demands, but rather, and for certain types of goods,
the pressures generated by supply through the use of marketing levers,
and the image companies have been able to build on the different
markets.
For example, in certain cultural settings (like Japan), the actions of
foreign managers, aimed at “internalizing” local behaviour through an
assimilation process addressing the host countries, produce a sort of
homogenization of needs and acceptance of new products by local con-
sumers. The “foreign” operator’s adjustment to the local market’s culture
in order to become an internal operator also lays the groundwork for
marketing, on site, other company products as well, differing from those
used for initial penetration; it is also an effective deterrent against threats
from potential competitors.7
These issues have been the subject of debate in the economic and cor-
porate literature and, already in the early 1990s, some scholars’ (Vaccà
1990) interpretation of the globalization processes of markets and com-
petition supposed: that a company’s transnational development could be
configured only as a function of the local systems of reference; and that
globality should be understood as the “triumph of diversity” in a frame-
work of economic interdependence, rather than as undifferentiated
homogeneity of social organizations and behaviour in production and
consumption.
7
For example, contributing to Coca-Cola’s worldwide success were the development of complete
local infrastructures in the various countries where the company penetrated, the deliberate on-site
introduction of the pillars of the commercial system, and activity performed by the parent com-
pany to stimulate local demand.
Despite the conclusions reached by some pioneering empirical verifi-

cations (Laurent 1983; Adler and Jelinek 1986), which confirmed the
success of the international transferability of products, behaviour, and
managerial practices only where there was cultural compatibility of
nations and companies, the myth of “pure” global strategy pervaded
much of the economic and corporate literature of the 1990s, and, for
numerous large companies, was the strategic objective to be pursued.
In more recent years, the results of empirical research on the issue
(among others, Aaker and Joachimsthaler 1999; Rugman and Hodgetts
2001) show that successful companies capable of maintaining or improv-
ing their competitive position have been able to revisit their corporate
policies, transitioning from modes of implementation typical of global
strategy into a “holistic vision” aimed at forging synergies in the specific
settings where the companies operate.
According to this view, it appears clear that, in searching for local
interactions, decision-making bodies have to be able to analyse the spe-
cific features of the settings and to create appropriate mechanisms for
assimilating differences that, in keeping with local behaviours and regula-
tions, are capable of rooting the peripheral units deeper into their specific
settings (country, or homogenous group of countries or of territorial
areas). This is because many environmental factors considered constant
on the domestic market can become variable, and non-knowledge can
place companies before cultural, social, and economic differences that are
so distant that the decision-making policies implemented within habitual
confines can become inapplicable; the very modes of acquiring tangible
and intangible resources can also change significantly.8
8
Even Coca-Cola, which offers a product considered universal in the collective imagination, had to
revise its strategies, which until a few years ago were to be considered “global”; currently, the parent
company’s guiding principles are “think local and act local,” which the company has implemented
by increasing the decision-making power of peripheral managers; and through multipoint market-
ing, aimed at affirming Coca-Cola brands on regional and local bases (in addition to numerous
non-profit activities differentiated for individual settings, that can only reinforce the company’s aim
to be accepted by local communities as an internal operator). This was the case with Gillette, which,
after its reorganization in 1988, segmented the global market into homogenous areas and created
divisions with decision-making power in each segment, thereby managing to integrate into each
macro-area in which it operates (Moss Kanter and Dretler 1998).
However, to internalize specific local conditions, it is necessary to

develop a capacity to acquire knowledge on the host countries’ traditions,
behaviour, and customs. Therefore, for foreign companies to adjust to
internal operators, new entrants have to implement commercial policies
that gain traction on the outlet markets or are able, when the market or
the type of good so requires, to adjust the companies to the “internal
operators.”
A new way for the international company wishing to operate in a per-
spective of globalization to compete is thus created, one less and less
dependent on the interaction processes put in place with the country’s
environmental setting, and more prone to seizing forms of homogeniza-
tion and symbiosis, with the logic and behaviour typical of the settings in
which it seeks to acquire competitive advantages.
At most, for some scholars, lower dependence on the country of origin
transforms the company pursuing global strategies into a stateless corpo-
ration with no ties to the home country or to local communities—an
abstract entity marked by a management with its own specific culture;
except for certain large industrial groups with a high information intensity
and for certain large financial and services groups, scholars in most cases
agree as to the risks an entity like this can run, such as the risk of losing
credibility both on the domestic market and in the host countries.9
However, the choice of competing in a perspective of multipoint dif-
ferentiation can create pockets of inefficiency that, over the long term,
may compromise the company’s value creation: the numerous cases of
failure present in the literature have led large companies to privilege
development strategies in markets culturally close to domestic ones, in
such a way as to achieve greater synergies.
It seems clear that to strike a sort of compromise between standardiza-
tion and adaptation, the manager must, in a dynamic perspective, move
between two kinds of risks: the risks, inherent to an abstract universalism,
9
It bears noting that the alliance between Lufthansa and United Airlines neither caused the two
airlines to lose their national identities nor significantly changed the strategy pursued by Lufthansa
on the domestic market. Conversely, examination of actual situations has also shown that, through
a careful marketing activity, some companies have been able to spread, internationally, products
affirmed precisely by exploiting the image of the country of origin perceived by the local mass
media: examples of this are the famous “Marlboro Man” or the American chain of “French hockey-
style cafes.”
of rendering business activities ineffective, and those, inherent to point-

by-point adaptation to local situations, of creating inefficiency.
Moreover, what the text in earlier pages has pointed out in terms of the
advantages gained by undertaking internationalization strategies in clus-
ters of countries or homogenous areas would appear to confirm the
thinking of those scholars who, in debunking all the myths present in the
global approaches, encourage company managers to “think regionally, act
locally, and forget everything that is global.”
The information is also true for the pursuit of the second objective of
global strategy—centralized coordination along the nodes of the supply
chain. Implementation problems arise in connection with the choice of
the most rational spatial deployment of the activities in the value chain,
for the search for the resources to be coordinated and transferred through
the multinational network, especially if the comparative location-specific
advantage is based on the exploitation of lower-cost factors.
Economies of cost, which should be at the basis of the location advan-
tage, may in fact fade if an inattentive examination of the specific local
environmental conditions leads, a posteriori, to more difficult relations
with local players, to costly monitoring of productions in order to main-
tain quality standards, and to more complicated and burdensome activi-
ties of coordination among the activities along the nodes in the supply
chain—from obtaining raw materials to transferring output to distribu-
tion centres; not least, there is also the danger of creating local competi-
tors, especially if productive technologies can be easily appropriated.
In the perspective that has been outlined and in the current economy
of the markets, a global strategy must therefore focus on seeking the right
trade-off between the economic integration of the activities performed in
the different settings, in terms of horizontal homogenization and vertical
coordination of dispersed activities, and adaptation to specific local
conditions.
Today, the search for the right trade-off can more easily be optimized
thanks also to the specific nature of the new technologies based on infor-
mation science. By permitting more consistent flows of communication
and higher levels of flexibility in productive, organizational, and manage-
ment processes, these new technologies also allow companies to adapt to
the variety and variability of the specific settings, while spending less in
terms of energy and resources.
The Risks of a Systemic Disconnection

In coping with the process of geographic decentralization of the activities
in the value chain, every multinational necessarily comes into contact
with different environments, each of which may require different modes
of interaction—modes that take on different characteristics and intensity
depending on the nature of the relationships the company establishes
with the players to which the activities are decentralized.
First of all, in intra-organizational networks, problems arise of decen-
tralizing decision-making power to peripheral managers. By necessity,
this power becomes greater with the broadening of the sphere of relation-
ships that the decentralized unit may implement with players in its envi-
ronment, due both to the country’s larger size, and to the greater
possibilities for peripheral managers to seize local opportunities.
A conscious conviction of central managers as to the need to delegate
authority to peripheral managers, to set aside rigid control systems, and
to create suitable coordination mechanisms must come into play; these
mechanisms are necessary in order for context-specific knowledge to be
translated into a language shared by all the network’s units and by the
centre, however distant it may be.
In this way, the configuration typical of the weakly connected system
(Orton and Weick 1990) is achieved: the connection among the elements
is provided by the fact that they are connected to one another while at the
same time maintaining a dose of determinacy. This connection, then, is
weak if the elements are subject to spontaneous changes and also conserve
a certain degree of independence and indeterminacy. This is then a sys-
tem that is open and closed at the same time, both indeterminate and
rational, spontaneous, and deliberate.
The information refers to an interpretation of the systems’ dialectics, by
which—according to the same authors—the following systems are seen:
–– Weakly connected systems, those where the reactivity and distinctness of

the individual parts coexist
–– Closely connected systems lacking distinctness
–– Unconnected systems, with no reactivity or distinctness
–– Disconnected systems, where there is distinctness, but no reactivity
Starting from Orton and Weick’s arguments, to examine systemic situ-

ations in a perspective of configurations companies can take on, distinct-
ness and reactivities have been interpreted with a corporate interpretation
key (Fig. 2.2):
–– The distinctness of the systemic components may be likened to the

existence, in the system’s individual units, of a more or less high level
of decision-making autonomy;
–– Reactivity may be seen as a level of interdependence of the relation-
ships binding the systemic components, a vision of acting of the indi-
vidual units aimed at achieving a common strategic goal; it therefore
supposes a coordination activity exercised by central managers over
peripheral managers, aimed at creating a spillover of knowledge of best
practices, successful actions, routines, and corporate policies.
The positive effects of a weak connection among the parts of an interna-

tionalized company have repercussions on the system’s effectiveness: more
inert and resistant to conscious, planned, and integrated change, yet
Coordination of the subsidiaries
Closely connected systems Weakly connected systems

Strong
Weak Disconnected systems Non-connected systems

Absent
Lack of autonomy Presence of autonomy

Delegation of autonomous decision-making to subsidiaries
Fig. 2.2 Systemic configurations of the organizations. Source: Our elaboration

more adaptive and creative locally; more stressful yet more motivating for
individuals; variable in fragmented contexts and consciously undeter-
mined where connected systems would be paralysed.10
Included in this perspective are the current international networks of
companies that wish to achieve satisfactory levels of effectiveness and effi-
ciency: they blend different organizational principles, local responsibili-
ties and coordination, hierarchical control and market incentives, and
technical specialization and results orientation. The very increase in the
relationships that an international company’s local units implement with
the operators in their setting weakens the bonds of connection existing
among the parties in the organizational system which, since it can no
longer be characterized as a set of indistinguishable and therefore non-
autonomous parts that act reactively with a high dose of determinism
(closely connected system), aims towards alternative configurations increas-
ingly characterized by a greater degree of independence and higher levels
of indeterminacy (weakly connected systems).
Clearly, for the organizational system not to become wholly discon-
nected, it is necessary to seek, precisely through coordination mecha-
nisms, to halt decentralized units’ excessive thrust towards independence,
and to create more interaction between the parties. This is the case, for
example, of the multinationals that manage units abroad with the logic
of a portfolio of financial assets; from a national perspective, it is also the
case of a state enterprise operating through local entities to which it leaves
broad autonomy, without performing activities to monitor and coordi-
nate initiatives undertaken autonomously.
Absent an effective coordination action, an organizational system
might take on the configuration of a set of loose cannons that, over the
long term, can only compromise the very survival of the corporate
organization.
Conversely, the presence of weak relationships among a system’s units
is not on its own a restraint on the spread of innovative ideas in the com-
pany; to the contrary, weak relationships, which leave more room for
10
Orton and Weick also stressed that weakly connected systems—a classification that can include
schools, hospitals, law enforcement organizations and judicial systems—are not failed bureaucra-
cies but diverse organizational forms that, while not characterized by coherence, allow the highest
degree of efficiency possible in an unstable and complex environment to be achieved.
creativity and the capacity of thought of individuals, may represent a sort

of “channel” through which innovations and new ideas may spread
among members of an organization or among groups of members; on the
other hand, strong bonds hopefully exist between the members of each
individual group, so they themselves might become bearers of innovative
decisions in the company.
While the given information has underscored the difficulties inherent
in the processes of coordinating the activities of multinational organiza-
tions in which the presence of the “Corporate” should at least theoreti-
cally guarantee, through its leadership, the system’s greater stability, the
situation becomes even more critical in the presence of a network of
international alliances created to exploit the different partners’ distinctive
skills through synergies and reliance on complementariness.
The specific cultures of the environmental settings in which the part-
ners operate already give rise to an initial obstacle to change due to the
search for a homogenization of managerial behaviour, necessary for
achieving the agreement’s objectives and synergistic competitive advan-
tages. For networks of strategic alliances between companies—in which
each partner operates in accordance with autonomous logic and behav-
iour and everyone aims towards a common goal—to be successful, inter-
personal relationships must be close, and founded upon trust. In other
words, the different business units composing the network of alliances
must interact in accordance with a team logic.
Alliances that do not see a parallel development, within the network,
of cultural homogenizations, and that are then configured as disconnected
systems, lead to commensalism or parasitism, which is to say the impos-
sibility of achieving the alliance’s own goals.
Management’s coordination activity is therefore a necessary prereq-
uisite for preventing the total disconnection of the intra-organizational
system, which is to say the components’ lack of reactivity in the face of
changes in the internal and external environment. On the other hand,
the presence of greater and closer relationships between central and
peripheral managers brings greater or lesser cognitive advantages
which, depending on the interested parties’ operative and managerial
resources, can be translated into the development of relational learning
processes.
Interaction by creating constructive dialogue among actors with differ-

ent cultures and behaviour can allow the central bodies to better assess
the exact dynamics of the local situations and to improve the procedures
regulating the dynamics of the knowledge accumulation processes.
Through coordination, the groundwork is also laid to develop learning
by imitation, when the transmission of information and knowledge
among affiliates, made possible by the coordination exercised by central
managers, creates emulation and adaptation. Thus, for the entire rela-
tional structure, a spiralling learning process is carried out; its central
element is the creation of new knowledge.
Therefore, the choice of the placement of affiliates and of the managers
to be assigned to them, the level of delegation of authority, and the iden-
tification of coordination mechanisms, become strategic levers that the
geographically disperse large company can and must use to acquire com-
petitive advantages; identifying the levels of delegation and the coordina-
tion mechanisms to be used requires, a priori, knowledge of the specific
nature of the environments where the business activities are located.
Yet, empirical verifications have shown that when decentralization
processes are implemented in unfamiliar environments, the costs/benefits
analyses connected with a given choice assess first of all—and often
only—information pertaining to the economic and regulatory situation
of the localization area. It is rarely considered that the environmental set-
ting where the company is to operate results from the interaction of mul-
tiple and complex variables, including the organizations’ culture, and
deeply rooted values can play a decisive role in accelerating or countering
affiliates’ operations.
In this regard, precisely the failure of the first entry operations into the
countries of Eastern Europe led certain multinationals11 to seek possible
modes of implementation of strategies able to create a closer interaction
with specific local environmental conditions. This research highlighted
the role played by Austria which, due to historical/cultural affinities,
serves as a node coordinating the policies for entering central and Eastern
European countries: multinationals coordinate the activities located in
the Eastern countries through their Austrian affiliates.
11
Including Siemens and Volvo.
Coordination problems become even more complex when decentral-

ization choices lead to the creation of transactional relationships with
independent companies (outsourcing activities to international third par-
ties). Large companies outsource activities not confined to more tradi-
tional ones of the tertiary sector (transport, distribution) or related to
processing phases generally with mature technology, but activities that
extend to complete business processes, to the entire supply chain, and, in
high-tech companies, to research and development as well.
With the increasing financial and currency difficulties faced by many
countries—not only in underdeveloped or recently industrialized areas—
and with developing political and ethnic conflicts, the hurdles to the effi-
cient maintenance of negotiations among companies, made even more
difficult by the existence of possible cultural and behavioural asymmetries
between the countries of origin and destination, grow as well.
In decentralizing activities to difficult areas,12 the increased costs con-
nected with monitoring needs and infrastructural shortcomings may in
fact work against achieving the economies underlying the decentraliza-
tion choices. An a priori analysis of the dominant culture in the various
settings can help make the choice of the localization area more satisfying,
and may also contribute towards finding solutions more suitable for over-
coming the conflicts that can be generated in inter-organizational
relationships.
As to the decentralization of activities to partners in collaboration
agreements, the scope of cultural differences may fully emerge during the
implementation of international alliances, when cross-pollination
between different cultures can create a sort of culture shock—one that
grows greater the more distant the actors’ cultures are, and is often accom-
panied by negative impacts on organizational involvement, on the part-
ners’ working environment, and on their respective performance. An
initial convergence of interests is not in and of itself sufficient to guaran-
12
The reasons leading a country to be defined as “difficult” involve the currency, regulatory, eco-
nomic, and sociocultural difficulties companies must face in order to implement business relation-
ships the creation of ingenious intertwinements of transactional and collaborative relationships,
often involving several actors and countries. In this sense, the following countries may be defined
as “difficult”: countries in Eastern Europe and Asia, Latin America, and the area of non-EU States
bordering on the Mediterranean referred to as “Mediterranean Non-Member Countries.”
tee the agreement’s success, since the key variable in forming and
maintaining a joint venture lies essentially in seeking a balance between
the cultural incompatibilities of the companies confronting one another.
The time to assimilate diversities and the hurdles to be overcome for an
effective collaboration between companies in different settings increase
the more dissimilar the partners’ cultural variables are, and the more
asymmetrical reciprocal knowledge is in the agreements’ start-up phase.
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3
Market Entry Strategy
Introduction
Several authors have dealt with the problem of understanding what fac-
tors are most important in evaluating a market. Industrial economists
place more emphasis on external factors, recalled in Hymer’s theories, in
internalization theory, and in institutionalist theory. In Dunning’s
approach as well, exogenous factors play a key role in choosing the mar-
ket to invest in if one considers that that the advantages of location are,
along with ownership advantages and the benefits of internalization, the
essential condition for profitable FDI. Scholars closer to the strategic per-
spective, influenced by the resource-based approach, instead place greater
emphasis on internal factors that, in the Uppsala school’s evolutionary
approach, become essential to evaluating and increasing the involvement
of firms on foreign markets. The contemporary perspective based on stra-
tegic management constructs, and therefore the need to combine internal
analysis and external analysis and the necessary consistency between these
and the market-objective features, does not reduce the importance of
exogenous factors in urging internationalization—factors that seem to
affect not so much the choice of whether or not to invest in a given

https://doi.org/10.1007/978-3-319-91551-7_3
arket, as rather the decision on how to invest and thus how to follow
m
(Calori et al. 2000; Couturier and Sola 2010).
As is often the case, reality is more complex than theory, and compa-
nies, in choosing to internationalize, are guided by a mix of motivations
arising from the desire to best exploit internal and external factors.
Internal motivations include many of the determinants identified in the
framework of the previous chapters: the desire to acquire global leader-
ship rather than to protect particular resources, or to exploit particular
cognitive resources originating from the cumulative wealth of the enter-
prises which—by identifying new business opportunities rather than the
ability to consolidate their image or reach a global dimension through
FDI in a particular marketplace—decide to expand their boundaries.
Internal factors therefore reflect the presence of exogenous factors that
represent unmatched opportunities for the enterprise (supply voids,
access to knowledge or technology resources, reduction of entropy risk,
possibility of increasing the efficiency of some value chain activities) in a
virtuous circle that sees the interaction between interior and exterior as
the element that best represents the reality the enterprise is dealing with.
Internal motivation/external factors also affect the choice of entry
mode. While companies often pursue composite goals that simultaneously
operate in different ways in different markets, it is possible, seen from the
perspective of simplification, to sketch some of the main motivations that
drive businesses to move towards a trade that is more international than
productive (Saviolo 2008). Compared to the first option, the main reasons
lie in the following: the desire to increase sales volumes; the ability to reach
a global dimension out of a desire to diversify market risk; the ability to
increase profit margins by selling at higher prices; the need to discard
stocks of finished products; and the ability to act as first mover on a new
market. Compared to the possibility of adopting a pre-emptive strategy,
the benefits generally accorded to the first entrant are greater opportunities
to raise the loyalty of local clients, the ability to access scarce resources, the
ability to leverage resources for higher returns, and the ability to create
stable relationships that increase switching costs for local partners.
However, being the first mover exposes the enterprise to a number of
disadvantages that need to be carefully evaluated. They are high market
exploration costs, bearing costs for problem solving (dealing with foreign
Market Entry Strategy 61
market analysis and finding the most appropriate solutions), and uncer-
tainty regarding the intensity and conditions of demand (which may
delay the timing of the investment). In general, however, empirical evi-
dence shows that, when well designed, the pre-emptive strategy offers
businesses a better chance for survival.
The second option, however, is generally linked to the following deter-
minants: the ability to take advantage of work-related benefits, access to
particular productive resources, proximity to outlet markets, and access
to different cognitive and technological resources. Synthesis, and there-
fore motivation, can be linked to achieving higher levels of efficiency or
to the need for technological learning.
The Main Steps of International Expansion

The planning of an internationalization strategy is based on an analysis
process aimed at identifying target markets, assessing the opportunities
and threats that characterize them, and identifying the most appropriate
entry mode. It is a complex process that must combine the resources and
skills that the company has with the opportunities and threats that char-
acterize the target markets.
Reflecting the strategic management model, the planning process has
to proceed through stages, identifying opportunities and threats that
characterize the macro environment, and then defining the extent of the
forces of the competitive environment that would affect the enterprise’s
business on that market. The study of the external environment, consis-
tent with resource-based assumptions, goes hand in hand with analysis of
the resources and skills that the enterprise has or can acquire to ensure
success in the new reference market.
The analysis process is not always simple; on the contrary, the sources
that the company has available are often varied and unevenly coherent,
especially when the interest concerns emerging or difficult markets. It is
in this perspective that management market skills become key: the ability
to understand the value of acquired information and to understand what
utility (applicability) it has in the specific enterprise is a sine qua non for
the strategy’s success.
Foreign market analysis cannot be considered a linear and standard-

ized process: psychological distance, the gap between the home and host
market’s development levels, language barriers, and the socio-institutional
context of the country of destination are all factors that strongly affect the
difficulty and intensity of the analysis. It is, however, a fundamental
moment in strategic planning even if the choice of internationalization
derives from the emergence of spot opportunities for the enterprise.
Those who do not acquire adequate knowledge of the target market may
not understand the threats they face or even the barriers that can limit the
attractiveness of these markets. In many cases, non-planning firms rely
on intermediaries who, by pursuing their own goals, do not always serve
the business’s interests. In even worse situations, companies that do not
learn often make the mistake of channelling their products, with negative
impact on their brand placement.
This is the experience gained in Germany by many Italian pasta com-
panies that entrusted their products to large local buyers, available mainly
online, and also at low prices given the strong economies gained by pur-
chasing the products from the producer; these companies sold pasta in
medium-low market segments, in fact undermining the craft production
of small Campanian pasta makers, or even the functional value of those
making “special” pasta (lower sugar content, organic, etc.).
Some Evidence in the Italian Pasta Industry

In 2011, a major German chef wanted to find a quality Campanian pasta to
be promoted in Germany and sold through a distribution network of spe-
cialty products. Having come to Italy often, the chef was acquainted with
some well-known brands in the Gragnano area, which, however, being
already established in the distribution channels and therefore known to the
German public, would hardly be accepted by consumers as specialty
products.
Research then focused on small craft pasta makers, products distrib-
uted in Italy through special channels and still not mass-produced. This
research led to the identification of some valuable brands from Torre
Annunziata and Gragnano; nevertheless, not even in these cases did the
deal prove feasible. The problem, in all three cases, concerned neither
the product’s high and certified quality, nor the quantity or condition of
the supplies, for which the German distributor was rather flexible. The
Campanian enterprises, in theory, ticked every box for success on the
German market, but a problem, neither insuperable nor unexpected by
pasta enterprises, did not allow negotiations to be concluded: firms that
in the past had entrusted the selling of their products in Europe to buy-
ers or trading companies realized that their brand was, in the online
food portals quite widespread in Germany, lumped together with signifi-
cantly lower-quality pasta, in many cases destined exclusively for export,
and also of non-Italian origin. Association with these brands and the
spread of online products made it impossible to quickly reposition the
products.
Businesses also proposed launching a brand new for the German market,
but lack of planning and inability to control the market worried potential
German partners, which decided not to conclude the deal.
The literature agrees on the main moments in the strategic analysis

process, which essentially concern the following (Hill 1994; Hodgetts
et al. 1994):
1. Identification of target countries. This is an exploratory phase in which

the company verifies the presence of a potential market for its prod-
ucts abroad. Through exploring opportunities and risks in potential
markets, the company identifies its potential reference market. It is a
phase of analysis focused on the external environment and intended to
check the presence of barriers or risks that could reduce potential
cross-border opportunities.
2. Once the set of potential target countries has been defined, the firm
will have to decide on the specific area in which to implement its strat-
egy. This requires the company to carefully assess the potential and
specific risks of the individual markets and the degree of attractiveness
of its business. Macroeconomic analysis will therefore aim at assessing
the impact that individual macro-energy forces have on business activ-
ities and will be complemented by careful analysis of the competitive
environment by identifying competitors (direct, indirect, and poten-
tials), the characteristics of demand, and the contractual strength of
suppliers. The company considers economic, social, and geographic

indicators, which look for and evaluate the type of investment it
intends to carry out in the country (simple sale of products, realization
of commercial FDI, production relocation processes, etc.). Economic
indicators (e.g. GDP, per capita GDP, unemployment rate, and infla-
tion) yield information on the country’s current economic phase, con-
sumer buying capacity, low labour costs, the role of the state, and the
presence of laws hindering or facilitating investment. Socio-
demographic data, on the other hand, elaborate a picture of potential
consumer/worker profiles in the country. Although this is only a sum-
mary analysis, it can be of use for understanding the stratification of
the population, the presence of certain segments of interest to the
enterprise (consider products that require particular levels of literacy
or that are directed to particular age groups), the level of qualification
of labour, and so on. Significant information is also obtained from
geographic data: the country’s morphology, the presence of transport
networks, or, conversely, the lack of infrastructure may make invest-
ments in some areas inefficient or, in the case of an export, may require
addressing local intermediaries as still takes place today in several
republics in the Commonwealth of Independent States.
3. Having narrowed the set of target markets, and before starting the
entry process, the enterprise must be able to quantify or at least esti-
mate the major risks that characterize them. It is difficult, in fact, to
establish a chronological order between this phase and the previous
ones; Simply put, it may be asserted that while at the first moment of
analysis the available country risk data and investment risk are con-
sidered useful data already narrowing the scope of analysis; but once
the potentially more attractive markets are selected, the company will
need to deepen the level of risk analysis by identifying the impact
that financial variables, as well as political and social ones, may have
on their specific business. An initial major assessment concerns the
country risk that may have important repercussions on the profit-
ability of the investment, the ability of local debtors to honour their
debts, and the company’s ability to recover over time the investment
that was made. Although risk assessment is generally assigned to spe-
cialized institutions, it is useful for management to understand the
factors underlying country risk, which is one of the basic elements of

the analyses carried out by consulting firms and institutions inter-
ested in supporting internationalization processes of enterprises. The
intensity of country risk as a wider case of counterparty risk is obvi-
ously amplified in those countries that do not have regulatory and
financial institutions able to protect foreign creditors. Consider, for
example, the possibility of a country being exempted from the obli-
gation to comply with contractual clauses, or the hypothesis in which
a contract contains clauses in breach of current law that are therefore
null and void for local law. Situations of this kind create daily prob-
lems for businesses, especially small ones, that export to international
markets, and can only be reduced a priori, through adequate analysis
of the regulatory system and, hence, through identification of clauses
referring to the rules in force or establishing the use of international
arbitration (obviously in the signatory countries of the conventions
on the subject). Country risk assessment comes on top of the assess-
ment of financial risks associated with internationalization. These
risks, in the simplest assessments, are related to exchange rate trends
and to the possibility that the presence of economies administered or
the impossibility of using some payment instruments will increase
exposure to price risks. In any event, the risk assessment does not
generally aim at the a priori exclusion of a given market. In order to
reduce entropy risk, companies do not aim to exclude some markets
to the benefit of others, but, in order to minimize the risks, seek the
ways most appropriate for the specific characteristics of individual
markets.
4. After the process of analysing and defining the target market, the com-
pany goes on to evaluate the most suitable entry mode into the given
market. In the first case, the firm will have to decide whether to limit
its presence on foreign markets to commercial activities or, on the
contrary, to adopt production relocation processes. It is at this stage
that the goals the company intends to pursue through international-
ization—as well as the resources available to the process—take prior-
ity. The greater the involvement of upstream activities, the higher the
internationalization risk, and the greater the focus on the choice of
ways to ensure an adequate level of efficiency without exposing the
enterprise to the risk of losing control over important sources of com-

petitive advantage.
Having identified the most appropriate development path to meet the

company’s specific needs, the country will then have to evaluate the most
convenient and appropriate operational solution to achieve the intended
objectives. For example, in the case of internationalization, management
should assess the possibility of limiting itself to an export activity rather
than the design of a franchise network or the creation of a commercial
investment; in the latter case, it will have to decide whether to build a
new network, acquire a local competitor, or still opt for a strategic part-
nership. Each solution has potential advantages and criticalities: limited
investments often have fewer opportunities to control the sources of
competitive advantage and even fewer learning opportunities, which
plausibly precludes transition to a more profitable presence on the for-
eign market.
Generally, the choice between alternative entry modes is carried out by
evaluating the following points (Couturier and Sola 2010): potential
demand; consistency between demand (or sales conditions) and product;
investment of resources; and flexibility.
The presence and magnitude of potential demand does not only affect
the choice of whether or not to export to a given market; on the contrary,
it can be an essential element in choosing whether or not to make a pro-
ductive investment, given the possibility that the plant’s output is more
or less easily located on the foreign market.
The second element concerns the greater or lesser consistency between
the product offered and the characteristics of demand (culture, institu-
tional barriers, packaging, certifications). This factor directly affects the
choice of direct and indirect exports: if there are too many barriers to the
entry of products, especially for smaller companies, the choice of turning
to a local intermediary often becomes a compulsory path to take. It may
also impact the realization of a productive investment and, more particu-
larly, the choice between managing one’s own premises and collaborating
with local partners, who will more easily access the information needed
to overcome the barriers. Among other things, as has happened to
Japanese automotive companies and, as is the case in many agri-food sec-

tors, the presence of tariff barriers frequently does not drive companies to
the creation of FDI rather than to international trade.
As far as resources are concerned, these are a central element of choice.
The term “usable resources” does not exclusively connote those owned by
the enterprise, but also those easily acquired—yet also easily integrated
into the enterprise. In general, limited resources—but also the desire to
reduce the risks resulting from the excessive involvement of resources—
drive companies to use collaborative rather than competitive modes.
The willingness to employ resources also depends on the estimation of
the gap between desirable and achievable results, also in light of the con-
tractual strength of horizontal and vertical competitors (presence of direct
competitors, degree of supply concentration, distributor power, distribu-
tion network quality, logistical difficulties, supplier bargaining power,
imbalance in the aggregate value chain, etc.). The example outlined ear-
lier in the text clearly clarifies the value of this gap and the impact it may
have on future business choices.
Flexibility of choice: as anticipated with regard to the internationaliza-
tion strategy, the strategic asset must be carefully evaluated in order to
avoid a subsequent rethinking of it, which would expose the enterprise to
high investment or re-conversion costs. Variety and environmental vari-
ability require the enterprise to preserve flexibility as much as possible,
and this is even more the case in less advanced markets where sudden
political changes, economic and financial shocks, and natural events can
quickly change demand conditions and affect the productivity of the sup-
ply. It is then necessary, at the same level of control over the strategic
importance of activities and the management of key relationships with
context stakeholders, for companies to show preference for collaborative,
more flexible modes, over competitive modes.
Generally speaking, some empirical analyses have shown that, as a rule,
involvement in foreign markets grows along with intensity of demand,
the international experience of the enterprise, its size, and the level of
economic development of the target country, and that, conversely, it
decreases the cultural and political distance between the country of origin
and the country of destination (Reddy and Naik 2011).
Case X
The German company X is a diversified enterprise which, while an agri-food
enterprise at the beginning of the twentieth century, operates today in the
following sectors: food, beer and soft drinks, sparkling water; wines and
liqueurs, shipments, hotel, and financial services.
The case concerns the food products division and, more specifically, the
food service segment focusing on food sales to restaurants, hotels, school
canteens, supermarkets, and other retailers. In 2007, the sluggish growth of
the domestic market led the company’s top executives to implement an
internationalization strategy aimed at affirming the HoReCa segment in
three main markets—Italy, Poland, and the United Kingdom—already char-
acterized by a good brand affirmation.
Once the target markets were identified, the leadership had to decide on
the most appropriate entry modes, based on process planning with regard
to some key issues:
1. What are the main factors that could affect the company’s success on the
market? These included a similar assessment of factors such as market
size, demand segmentation, competition structure, and the relationship
between the actors in the supply chain.
2. What are the key factors that could drive the enterprise to success?
What is the ultimate likelihood of success for a new operator?
This question is obviously linked to the previous one but more specifi-
cally focuses on assessing the presence of a possible supply void, or
any niche in which the operator can be established. It is therefore
connected to the consistency between the products offered and
the characteristics of demand, as well as the presence of special facili-
ties or, on the contrary, institutional barriers to the entry of new
businesses.
Enterprise X has developed three specific analyses to evaluate the most

suitable entry mode for each of the three specific markets.
Starting from the United Kingdom, the UK food service market is the
largest in Europe and is characterized by the second largest growth rate—
at any event the highest rate among the four countries considered
(Germany, Italy, Poland, and the United Kingdom). Applying the Compound
Annual Growth Rate model, the company estimates an average growth
rate of 3% to 4% over the next few years. The Italian market is smaller
than that of the United Kingdom but is attractive for its high rate of
growth, which should be estimated at around 8%. Lastly, Poland is by far
the smallest of the three markets, with a turnover of 2 billion (against
28 billion in Italy and 31 billion in the United Kingdom) and a growth rate
of under 3%. Growth rate is the most obvious difference between the vari-
ous markets; food habits—although the specifics of the different cultures
present, in fact, some important homogeneities—are linked to the ten-
dency to eat out and have smaller families, as well as to the need to con-
sume quick and easy meals without renouncing food quality. From the
point of view of product adaptation, Italy and the United Kingdom, which
have a strong propensity towards quality and specialty foods, have the
greatest potential, given that within the company’s product range, 75%
would require no adaptation.
The competition analysis highlights three main categories of players:
1. Food producers Unilever Bestfoods, Nestle, Masterfoods, Danone,

McCain Foods, Kraft Foods, HJ Heinz, Cadbury, and Barilla are all consid-
ered the main industry players.
2. Other regional companies, for most specialized and limited production
product lines.
3. Distributors, and hence wholesalers, which offer a wide range of prod-
ucts and services; Cash and Carry, which mainly supply small restaurants
and are threatened by large chains of organized distribution; direct sell-
ers and retailers.
As for direct customers, these are essentially represented by business

operators (hotels and restaurants) and institutional operators (school, can-
teens, hospitals, personal and public administration facilities). Although the
structure of the three countries is similar, there is a markedly different level
of concentration of competition and contribution by actors to value cre-
ation. The majority of this sector is run by a small number of market
leaders.
In the United Kingdom, the acquisition of a producer was considered the
most appropriate solution. The market’s high level of competition required,
in fact, choosing a method that would make it possible to enter the market
quickly. For the same reasons, greenfield investment was discarded, while
the possibility of a partnership with local distributors was not considered
optimal given the risk that, thanks to increased knowledge and greater
market control, the latter would develop opportunistic attitudes that might
eat into the German company’s margins.
The acquisition target was found among 60 small- and medium-sized
local manufacturing companies. The criteria behind the choice were the
range of products offered, the features of the covered segments, the mar-
ket resources and logistics network, geographic coverage, and the poten-
tial for cross-selling with the retail business.
Conversely, in Italy, analysis has led to the choice of a greenfield invest-
ment, but gradual and planned, with a reduced sales force to increase over
time. The choice was justified by the lower intensity of competition, the
greater market fragmentation, and the lack of distribution. In Italy, dis-
tributors and producers are still relatively small and the market is growing,
faster than in other European countries.
Poland had a complex situation: an estimated Compounded Average
Growth Rate (CAGR) of less than 3%, but high potential linked to the
plausible increase in per capita income. A small number of multinational
producers control 50–60% of the market, and several medium-sized
wholesalers are undergoing a consolidation process. Finally, in contrast
with the other two countries, only 30% of the catalogue was likely to be
sold without alteration. The German company therefore opted for a
partnership with a well-established regional wholesaler on the Polish
market. This option was preferred for a better understanding of Polish
market potential over a relatively short period of time and limited strate-
gic risk. An acquisition would have been too risky given the uncertainties
of the market and the institutional context.
Choice of Entry Mode

In implementing an international growth strategy, a company can
choose among different modes of strategic action by setting up competi-
tive relationships and collaborative relationships with other market
players.
Competitive relationships are essentially the result of the development
within the company of all those activities aimed at improving their posi-
tion on current markets or new outlet markets. Increasing resources and
expanding knowledge can be achieved through:
• internal development, implemented through the company’s know-

how and knowledge deployment (acquisition of technology and tech-
nology, recruitment of specialist managers and new staff);
• external development, achieved through the impacts of non-possessed
knowledge (technological, market and general management); cases
arise from the acquisition of companies that possess complementary
or synergistic knowledge, acquisition of suppliers (vertical upstream
integration), or business customers, distributors, and downstream
manufacturers following the implementation cycle in the company

(vertical downstream integration);
• collaborative relations coming to fruition in cooperation agreements
(or strategic alliances) between companies that, while retaining their
decision-making autonomy, decide to cooperate in order to:
–– exploit the cognitive asymmetries of the parties to the agreement
through the use of specific technological, market or production
complementary knowledge (asymmetric or, as Porter claims, type X
alliances);
–– create synergy in the results (synergic alliances or Porter type Y)
through the joint operation of partners possessing distinctive
competencies
From this standpoint, it is clear that the formulation of a strategy for

the development and choice of ways to implement the pursuit of strategic
objectives leads not only to the delimitation of the competitive environment
in which the company will operate but also, from a systemic point of view,
to the creation of a new set of relationships that the enterprise will have to
establish with the interlocutors in its environment. Therefore, the deci-
sion-making process requires defining the following elements:
–– Control over (or ownership of ) the resources that the enterprise will
invest with new and old actors in its environment in order to pursue
the chosen strategy;
–– Cooperative relations (strategic alliances) that the company intends to
establish with different partners along the value chain corresponding
to the strategic choices made;
–– Market relationships that place the business in relation to input pro-
viders and customers for their output. It is in this relationship that
involves the contractual power the company has managed to conquer
in its market through behaviour, strategic actions and managerial
practices;
–– The competition relationships that bring the enterprise into conflict
with its present and prospective competitors. These can be both actual
or potential competitors.
Entry choices show different degrees of complexity and can follow two
evolutionary paths of business-to-business (transversal) trading or the
transfer of productive and oriented resources and technologies, and
therefore the acquisition of inputs (non-trade); it should also be noted
that the final orientation of the actions taken by the companies, not
directly related to the action taken, is always to place their products and
services on the outlet markets as much as possible.
From the point of view of internationalization driven by the search for
more defensible competitive advantages, companies tend to place their
output outside domestic borders, both to increase their growth rate and
to gain more strength in their actual competitors and potentials. In this
sense, businesses both large and small tend, or should tend, to expand
outlets. By expanding the outlet market, the risk of a saturated market is
reduced for businesses in the same area, where it is virtually impossible
for them to maintain their growth rates.
Vertical integration, as is known, occurs when an enterprise acquires
control over an upstream or downstream activity either through internal
growth manoeuvres (implementation within know-how and knowledge)
or by means of external growth manoeuvres (acquisitions and mergers),
with the goal of massively smoothing the efficiency of manufacturing
processes and the effectiveness of economic outcomes. Within this
scheme, it is clear that integration is a phenomenon that can also cover an
internationalization dimension when involving companies operating on
different markets. In particular, the integration process offers manage-
ment the opportunity to diversify the sources of technological, organiza-
tional, managerial, and market knowledge, because, as the production/
distribution cycle expands, so does the company’s knowledge of the tech-
nologies used for the production of raw materials and semi-finished
products, and of the market for its products.
The integration process can take place through mergers and acquisi-
tions, helping to rebuild businesses and to gain market positions with the
speed that simple internal development could not allow. They guarantee
the ability to realize all the potential benefits of a combination of activi-
ties and capabilities, in ways not allowed by other forms of partnership.
In addition to the undisputed advantages offered by acquisitions and
mergers, it should not be forgotten that it creates, with external integra-
tion, the level of organizational and managerial complexity of companies
that are in charge of managing new competencies, that is, new profes-
sionalism and non-family activities.
Even in an internally integrated way, the greater level of complexity
compared to exporting—found in downstream forms that, by requiring
the creation of special units finalized for the overseas marketing of the
company’s products, involve the activation of more expensive coordina-
tion mechanisms and greater cognitive needs for access to outlet markets
and the success of the initiatives undertaken—is clear.
If new forms of international development have emerged from the
uncertainty of overseas operations—given the different types of strategic
alliances in our day—the growing spread of increasingly sophisticated
knowledge driven by the growth of relationships between transnational
actors has created a driving force for the growing complexity of the exter-
nal environment of enterprises.
The emergence of new modes of non-competitive foreign involvement
(alliances), on the other hand, “activate—and do not squeeze—competi-
tive confrontation” (Vaccà 1986) and the organization of externalities,
including collaborative strategic modes, poses for the company, in a
dynamic perspective, “problems of greater vulnerability and uncertainty,
and hence the greater need for organizations to adapt to the environment
in which they operate” (Calvelli 1989).
In deciding on the evolutionary paths to follow, choices between
modes of competitive development and collaborative modes require
management to strike a proper balance between the two alternatives, and
the ability to identify the most appropriate institutional structures, in
which both competition and cooperation should take place (Teece 1989).
The conclusion reached by Teece’s analysis places the emphasis on a col-
laboration that may prove necessary to stimulate competition, especially
in fragmented sectors.
Competitive Entry Modes: Import/Export

For many firms, exporting is the simplest way to enter foreign markets,
and consists of selling beyond the company’s output boundaries. It is gen-
erally a mode associated with other forms of presence on foreign markets,
but for small companies, it is often the only form of internationalization
they implement. Export to foreign jute markets reduces entropy risk and
positively affects brand awareness while contributing positively to consoli-
dating corporate image and customer loyalty.
Exporting can take place directly, if the enterprise develops direct con-
tact with the foreign market, involving its own sales personnel or resources
that cooperate on a continuous basis with the enterprise, or indirectly, by
contacting specialized intermediaries that serve as an interface between
enterprise and foreign markets. The second choice, albeit less costly,
exposes the company to significant risks and reversion costs that should
be carefully evaluated before embarking on such a path.
Small businesses, which do not usually export or do not have a stable
flow of exports, generally show interest in operating on foreign markets
through indirect exports, leaving other organizations the initiative to
sell abroad, while continuing to focus on the home market which
remains a priority. Subjects involved as intermediaries that take over the
initiative to sell abroad may be of a different type, and the border
between one type of broker and the other is not always clear. An essen-
tial element in differentiating the services offered, and therefore the
appropriateness of turning from one to the other, lies in the intermedi-
ary’s ability to represent several competing products and to be special-
ized in product or market. Generally, the following classification is
proposed (Calvelli 1998):
–– Large buyers operating in the target market or in the region to which

it belongs (buyer).
–– Importers/distributors operating on a specific reference market.
–– International trading companies (trading companies), generally pres-
ent in multiple markets, usually acquire a number of products from
one country’s businesses to resell them to several outlet markets. In the
most difficult markets they often establish relations with other local
intermediaries (distributors or buyers).
–– Export consortia; in this case, they are consortia created by the same
companies that intend to export and are therefore more inclined to act
in the interests of the associated companies. In this case, the risk of
opportunism is lower.
In addition to brokerage firms proper are those that act as multi-firm

agents and that specialize in promoting products on foreign markets,
starting relations with local distributors, organizing participation in fairs,
and procuring trade partners. The main difference between this type of
broker and the companies mentioned earlier lies in the fact that the agent
does not purchase the products. It is therefore a hybrid form of interme-
diation that is potentially riskier than the others: the risk of the surplus
remains with the enterprise that self-assimilates its learning process by
relying on specialized figures in initiating contacts with local distribution
and, hence, in the composition of its positioning on foreign markets.
Some Evidence in the Perfume Industry

The perfume industry is quite fragmented: besides large producers with a
very large portfolio of brands, there are medium-sized operators specializ-
ing in particular product lines and small operators that cut out successful
niches by focusing on particular essences, the organoleptic characteristics of
their products, strong references to the territory, or any other elements of
differentiation to offset lower brand awareness. In order to gain visibility in
retail distribution, the war between trademarks is ruthless. The market is
fragmented as well, and being present in a number of outlets sufficient to
reach an acceptable volume of business is often expensive for businesses.
The choice then becomes that of relying on the support of specialized bro-
kers, trading companies and international distributors that usually operate
exclusively in the industry, representing different brands and competitors.
The attractiveness of these distributors lies in the possibility, that the manu-
facturing companies have perceived, of arriving quickly on the shelves of
large perfume shops, and thus becoming accessible to consumers. On the
other hand, the risk of being in competition with excessively more well-
known brands and, therefore, of not achieving concrete results, is definitely
high.
An industry analysis has also highlighted that in this sector, the risk of
intermediaries’ opportunism is particularly high and is manifested through
the characteristic behaviours of the industry players. Intermediaries have
little interest in engaging in the sale of a specific product (or brand) in the
portfolio; on the contrary, they have the luxury of promoting all the brands
they represent and targeting simple, fast sales on all markets, thus enabling
them to quickly post their turnover and planned margins. It is often the
case that the products of the individual company are not adequately repre-
sented and that sales proceed according to an inertial mechanism that
seeks to increase the sales of some particular products and to stop the sales
of others.
Intermediaries often only promote the company X product that is useful
in completing their offer; in other cases, they promote only some offline
and other online products, simply following the spot opportunities that are
presented without any planning activity that can raise the same company’s
standing on foreign markets.
The opportunistic policy of intermediaries and the lack of information on
foreign markets has a negative effect on production planning and business
inventory management. This in turn brings negative effects on their profit
margins, which, in a negative spiral, see a decline over time in the resources
to be invested in foreign markets.
In all forms of indirect export, the risk that the enterprise might miss
development opportunities and that, above all, might be unable to
recover disadvantageous competitive placements due to the lack of infor-
mation on sales performance and customer satisfaction is very high.
Indirect exports, on the one hand, reduce the risks and costs incurred by
the internationalization firm; on the other hand, the intermediary, in
fact, carries the knowledge of the local market, which takes on the costs
and risks of the operation. In fact, there is a lack of direct contact with
customers by the exporting company, and a lack of information on mar-
ket trends. In addition, as commodity standardization increases, interme-
diaries tend to generate price competition between the various producers,
by threatening the possibility of turning to other suppliers.
In addition, underlying the buyer–buyer relationship is a potential
conflict of interest, since the intermediary often tends to act opportunis-
tically by maximizing short-term profits, while the firm, in its approach
to foreign markets, should maintain a more stable medium or long-term
perspective.
A more strategic approach to foreign market sales is that of direct
export, generally used by large companies, although some encouraging
signs are now evident among Italian SMEs. The largest exporting com-
pany generally connects directly with the foreign distribution system
through its own sales force, a stable foreign structure, or single-firm
agents. In this case, the enterprise initiates a learning process that expands
the chances of success, enabling the company to identify new business

opportunities or simply to consolidate existing ones. The risk, on the
other hand, lies in the possibility of making the company structure exces-
sively rigid, through the immobilization of capital on foreign markets.
Choosing the mode of export—direct or indirect—most suitable for
the enterprise depends on a combination of various elements. According
to a recurring classification in the literature on the subject, the complex-
ity of the factors influencing the different forms of entry onto the foreign
markets may be divided between those inside and those outside the target
market. The most important factors are connected to the following:
–– The temporal horizon of the choice: If the market entry corresponds to

a spot opportunity and concerns the disposal of finished product
stocks, it is plausible that the enterprise might opt for indirect exports
so that it does not bear the costs and risks associated with a medium-
to long-term investment
–– The strategic objectives set (growth rates, market shares, profitability):
If the goals are considerable and reasonably achievable, the firm will
opt for direct exporting, also to prevent the mediator’s mistakes from
causing damage to image or making it difficult to revise the deal with
distribution at a later time;
–– The type of product sold, such as specialty products or instrumental
goods that generally require a direct export through the creation of
their own units abroad;
–– The resources available and the knowledge that is part of the cumula-
tive assets of the enterprise: If the company has no knowledge of the
landmarks, direct export is risky; on the other hand, the company
might agree to postpone the choice of entry and save the time needed
to deepen the knowledge of the target market and identify people
capable of representing it successfully;
–– The strategic positioning of the product that the company intends to
achieve: If the positioning responds to a choice of differentiation,
direct market control is necessary to avoid image damage or misman-
agement of after-sales services;
–– Identifying opportunities and threats in the external environment
where the company intends to operate: An example of a threat may be
represented by an overly fragmented distribution system, logistical dif-

ficulties or even non-tariff barriers, all of which require the interven-
tion of locals or those at any rate well-placed in the local socio-economic
fabric.
Today, most companies acquire goods and components from firms

located in different countries. Globalization offers the opportunity to
exploit the location advantages for all the activities in the value chain, and
importing concerns the search for inputs on foreign markets. Increasing
competition requires preserving efficiency, but depending on their strat-
egy, firms are often compelled to look to high quality inputs, and this
requires the establishment of good relationships with foreign suppliers.
In some cases, firms involve intermediaries in the international purchasing
process, but more and more they are learning the advantages of direct
relationships. Above all, when imports come from distant countries,
characterized by different productive systems and different business cul-
tures, interpersonal relationships are crucial to guarantee the quality of
inputs and components. This is particularly true when the logic of inter-
national purchasing is not exclusively connected to efficiency, as, for
example, in the case of Label Rose.
The Experience of Label Rose

The Label Rose brand came into being in 2012, on the strength of the
Ammaturo family’s three decades of experience in the fashion and retail
sector. The style is entrusted to the family’s second generation—the young
stylist Francesca Ammaturo—and is the result of careful international fash-
ion research.
Francesca earned her diploma at the Naples Artistic Secondary School and
a bachelor of arts degree in Germany, and is about to complete her three-
year course in the management of international enterprises at Parthenope
University of Naples.
The company aims at becoming a European leader in the sector of fast
fashion in accessories. Its mission is: “Our corporate culture is to offer a
product that is trendy, with good quality at affordable prices, putting our
products within everyone’s reach.” It wants to develop an agents network
and a chain of single-brand shops, both directly owned and in franchising,
from the low initial investment. The product offers high performance in
terms of margin. We plan to open 35 points of sale over the next three
years, for a total of 45 in Italy and elsewhere in Europe.
Label Rose’s business currently consists of selling handbags, luggage, and
women’s fashion accessories. The term “accessories” is to be understood as
the following categories of goods: bijoux, watches, eyewear, scarves, hats,
key chains, purses, belts, gloves, and foulards. The commercial approach
calls for a network of points of sale, both directly owned and in franchising,
and a network of agents retailing to multi-brand shops. It also plans to
open an online sales channel in the coming months.
“The collections are produced at high frequency, to ensure quick product
rotation. They are designed for a woman attentive to details, who likes to
match accessories to apparel and takes care in creating her own look. Label
Rose products meet these requirements, providing numerous possibilities
for use and a wide range of product categories. In our shops, the consumer
can find a vast array of handbags, suitcases, and accessories.”
Most of the production takes place in China; in China, the business is cen-
tred upon the production of 70% of our goods. This country offers count-
less opportunities in terms of production, as it allows us to lower the
product’s unit cost and thus to increase margins, and the increased margin
has been crucial to giving our business a boost, and has allowed us to
develop the franchising formula.
Internationalization in China
At first, Label Rose marketed already imported products, selling them at
direct points of sale. “Surely, an important critical area that led us to out-
sourcing was the fact that our products were not personalized. Consequently,
the final customer identified our shops as simple retailers of anonymous
products, and therefore, outside of competitive prices, we had no added
value in comparison with our competitors. Instead, our objective was to
give the brand an identity, and to begin laying the groundwork for forming
a company with a sound competitive advantage over its rivals.
The advantage lay precisely in personally designing the products, choos-
ing a range of colours suited to our market, and branding them—making
them unique!”
“After a careful market analysis, and an analysis of customer opinions, we
decided to make a trip to China with one of the suppliers from whom we
purchased goods in Italy, and this marked a decisive step in our company’s
development.”
When we asked Francesca about the challenges and problems faced in
China, the first things she mentioned were culture and low quality.
“Chinese culture is quite different from Italy’s, and we encountered many
problems. Certainly, the most significant one involves quality. In fact, the
quality of productions does not match the samples on which the orders are
made; as a consequence, the result is a rather low quality that does not
conform to the standards required by a Western clientele that pays a lot of

attention to details. Often, even colours and quantities don’t correspond to
those ordered, and production types are not respected. Another important
point that greatly distinguishes Chinese culture from Italy’s is certainly the
lack of creativity and style. It is an established fact that they are excellent
imitators, but it is very hard for them to make samples from drawings.”
While culture is a problem, language is not a barrier. “It didn’t create
particular problems in terms of work; at any rate, on site we can count on
the sound assistance of our intermediary, who also serves as translator. Of
course, this does not simplify commercial operations, because it would be
far easier to speak with the supplier directly. The only difficulty lies in ‘feel-
ing isolated’ the moment you set foot in China, since very few people out-
side airports can speak English or another language.”
As regards production, the main problems faced by Label Rose are (1)
unqualified human resources, (2) very high staff turnover, (3) low work-
orientation also because of the very low salaries, and (4) lack of supervisors
who can monitor the workers in their jobs. But high competition encour-
ages them to keep their customers close, and therefore to try to solve all
production problems. Label Rose actually has strong and trust-based rela-
tionships in China, and the Chinese intermediary is able to find suppliers for
any kind of problem.
Another issue is represented by import costs. “Customs duties, transport
expenses, and all the accessory costs are a strong barrier to importing,
because they significantly impact the goods’ unit cost. As a percentage, cus-
toms duties represent 10% of the container’s total. Transport costs, on the
other hand, represent 6–7%, and include the transport of goods from the
various factories to the warehouse where it is checked, grouped, and
loaded into the container; transport from the warehouse to the port; the
cost of the container; transport from the port of Naples to our operative
headquarters. The person dealing with all the activities related to grouping
the goods, and checking and organizing the containers, also has a cost,
representing 5% of a container’s total.”
Label Rose’s logistics strategy is based on monthly deliveries of containers
holding a mix of all the goods categories. Their intermediary deals with the
entire logistics phase on Chinese territory. Similarly, they have no problems
with banks, as they have a line of credit allowing them to be insured by a
bank on Chinese soil.
With regard to the international positioning, according to Francesca, one
of the main strengths of Label Rose is “the difference in value in compari-
son with our competitors. For us, it is essential to win the customer’s loyalty
through our good quality, but at the same time we adopt highly aggressive
pricing policies. The objective is to create quick word of mouth between
those purchasing the goods and potential new customers.”
“In addition to factors of value, we are seeking to provide a medium-high

image both for the products and for the format of the points of sale. Display
and packaging are also seen to: these two elements are absolutely not to be
underestimated, since the former is an identifier of the brand, while the
latter is extremely important because the products we sell are often pur-
chased as gifts. Social media and the website are also given a lot of atten-
tion, because we’re convinced that a company that wants to stand out in
fashion must be very strong on the web as well. A good image allows you
to conquer a bigger market share, which therefore is not limited to the
middle/lower class, but can reach much of the higher one as well.”
While their products have not yet acquired an international presence,
they are confident that for the upcoming spring/summer 2019 season they
will be able to open new points of sale in Germany. “Germany is above all
one of the few European countries—if not the only one—that is seeing
continued growth, and we would like to exploit the many growth opportu-
nities offered by the German market, and to use them as a springboard for
development beyond domestic borders. Moreover, Germany is a country
quite close to me, since I spent my adolescence in a German city.”
Label Rose would like to leverage the following potential advantages:
1. The scarcity of established competitors; competitors on a worldwide

level can be counted on one hand: Accessorize, Parfois (but their points
of sale don’t have travel articles), Bijoux Brigitte, and Six (but their core
business is costume jewellery).
2. Country of origin effect, given that in Germany, Italian fashion is much
loved and appreciated, and they can exploit the Made in Italy effect.
Our sector does not suffer a lot from competition, other than from the
large apparel brands that have a wide array of accessories at their points of
sale; and from Carpisa, which is the leader in the sector of handbags and
luggage in Italy. But as I said earlier, our supply portfolio is much broader
than that competitor’s.
Like any other small, young family firm, Label Rose has to face the gen-
erational changeover, but it seems that no problems are on the way. “The
generational changeover took place rather naturally—we followed the
course of events without rushing things. Day after day, my father has given
me more and more trust and independence in my activities in the company.
As an aspiring manager, I like being able to supervise anything that takes
place in the company, and always to be able to say what’s on my mind.
Of course, there is no shortage of disagreements, but most of the time
they’re constructive, and lead to joint solutions that embrace my father’s
strong experience on the one hand, and, on the other, my desire to inno-
vate and to apply what I am learning in my university studies.”
Source: Our interview with Francesca Ammaturo
When efficiency is the final aim of international purchasing, the situation

changes dramatically, and firms do not establish direct relationships with
their suppliers. In order to reduce costs and focus on more valuable activi-
ties, such as R&D and marketing, firms tend to outsource their operations.
Quite often, firms find they care more about costs than about the reliability
of the final suppliers, which, above all in East Asia, are often different from
the outsourcer: companies make agreements with major components sup-
pliers, and the suppliers outsource this activity again to producers located in
cheap markets, without providing any guarantee on labour conditions or
organizational processes. This is very dangerous because, as the latest scan-
dals show, companies can have very bad image returns.
Some Empirical Evidence from the Columns

A world-well-known German producer of candies came under fire in 2017
for a scandal connected to its Brazilian suppliers. The German company pur-
chased carnauba wax from a Brazilian company that produced the ingredi-
ent under slave labour, and was also accused of sourcing its gelatin from
producers that maintained cruel conditions for animals.
The news spread the world over, producing a very strong negative effect
on the brand image. Although the company immediately tried to limit the
effects of the news, promising strong controls on the supply chain and
declaring the impossibility of accepting such conditions, boycotting began,
forcing the company to make considerable investment in marketing and
social initiatives to reposition its brand.
he Integration Processes: Foreign Direct

T
Investment
From a historical standpoint, international business development (espe-
cially in the United States) was a sequential phase in large firms’ evolu-
tionary expansion process. Corporations began to concentrate monetary
and knowledge resources in their core business and within the boundaries
of the domestic market, and only after having achieved a sustainable and
lasting advantage in the home business did they begin vertical integration
as a third-step diversification strategy.
‘Vertical integration, as is known, occurs when an enterprise acquires

control of an upstream or downstream activity, with the aim of maximiz-
ing the efficiency of manufacturing processes and the effectiveness of eco-
nomic results. Within this scheme, it is clear that integration is a
phenomenon that can also cover an internationalization dimension when
involving companies operating on different markets. In particular, the
integration process offers management the opportunity to diversify the
sources of technological, organizational, managerial, and market knowl-
edge, since, as the production/distribution cycle is extended, the compa-
ny’s knowledge of the technologies used for the production of raw
materials increases, as does market knowledge for the marketing of mate-
rials and products on the target markets.
In economic theory, internationalization by integration finds signifi-
cant placement within the approaches to transaction costs. Indeed, this
phenomenon was originally created by the businesses’ objective to con-
trol access to raw materials and to minimize their costs, or to more directly
control the outlet markets. However, these objectives were not always
optimizable through market mechanisms because of the high risks associ-
ated with the stipulation and successful outcome of the supply contracts
put in place by contractors, or linked to changes in consumer tastes and
their lifestyles. In addition, market mechanisms did not allow an effective
transfer of knowledge and of scientific and technological know-how, with
the effect of stimulating the convenience of internalizing the upstream
and downstream production phases in order to achieve greater efficiency
and, from this, a more effective entrepreneurial activity.
With regard to the phenomenon of MNCs, the scientific literature has
developed numerous interpretative models. In fact, while trying to iden-
tify the determinants of foreign direct investment, scholars have not
always captured the centrality of firms’ strategic choices and core compe-
tencies. The debate took place around
• a model of foreign direct investment (FDI) based on internalization

theory; and
• the model of international development of the large enterprise, whose
theoretical foundations reside in the theory of market power (Hymer
1976).
In particular, within the explanatory models of the international

development of large enterprises, the underlying idea is that, at the ini-
tial stages of growth, firms seek to constantly increase their internal
market share, through functions and expansion of production capacity,
in the hypothesis that increased market power (concentration) increases
profits (Cantwell 1989). For this reason, Chandler (1962) stresses the
market’s dominant and driving role. The author argues that, at a precise
historical moment, the phenomenon of firms’ growth stemmed from
the ability to exploit, through a more efficient use of resources, the
opportunities offered by the expanding market thanks to demographic
growth on the demand side, and technological progress on the produc-
tion side.
At present, with increased business management capability and the
development of globalization, understood as the interdependence of
markets and the ubiquity of competitive advantage, companies have
been able to strategically and internationally plan the most suitable
organizational configuration for the exploitation of different compara-
tive advantages, as well as the generation of exclusive competitive
advantages.
Global-minded business can consider all foreign markets as a single
large market, and distribute their value-chain activities on the basis of the
comparative advantages of countries, and the opportunities in the host
countries, considered of course along with the coordination costs of off-
shored activities.
In modern businesses, the phenomenon of international development,
through upstream and downstream integration processes, has gained
more importance. From the point of view of learning, it represents the
way in which the enterprise realizes its presence on the learning market,
thereby opening cognitive windows in environments with a higher inten-
sity of knowledge.
Acquisitions and mergers, the two ways in which the supplementary
process can take place, have a remarkable ability to contribute to the
renewal of businesses, helping them gain market positions with a speed
that simple internal development would not allow. They guarantee the
ability to realize all the potential benefits of a combination of activities
and capabilities, in ways not allowed by other forms of partnership.
Some Examples of International Acquisition

Miss Sixty, founded in 1987 by Wicky Hassan and Renato Rossi, has very
well-known brands, such as Miss Sixty, Energie, Killah, Murphy&Nye, and
RefrigiWear. After the crises beginning in 2009, the group lost revenues,
becoming an easy target for Crescent HydePark, which has aimed to exploit
Miss Sixty’s resources and managerial competencies to relaunch the com-
pany on the international market.
Our elaboration from Il Messaggero, 22 May 2012
De Tomaso, an Italian producer of well-known sports cars, was acquired
by the Chinese Ideal Team Venture, a carmaker, in 2015. De Tomaso’s techni-
cal specialties were the main reasons for this international acquisition Kong.
Our elaboration from La Gazzetta dello Sport, 28 April 2015.
Alongside the undoubted benefits of external growth manoeuvres

(which is what acquisitions are), we need to consider the potential prob-
lems connected with growth. Acquisitions increase organizational–mana-
gerial complexity, because they allow entry to new skills and new professional
figures, in addition to the challenge of managing unfamiliar activities. For
example, in the forms of downstream integration, the acquisition of special
units intended for overseas marketing involves activating more onerous
coordination mechanisms, and greater cognitive needs for access to outlet
markets and for the success of the initiatives undertaken. In addition, man-
agers face the difficulties of creating the necessary osmosis with new
entrants in order to establish a unity of purpose within the overall corpo-
rate environment—that is to say, in order to find a point of sharing between
beliefs and values that may, when the players come from dissimilar cul-
tures, diverge and hence create the conditions for the initiative to fail.
FDIs were seen as the main entry choices for MNCs. The efficiency
theories explained in the first chapter show, in fact, given the advantages
related to making investment in foreign markets (advantages, however,
that bring increasing environmental turbulence and the hyper-
competition linked to globalization), FDIs today pose a number of risks
that often push businesses to opt for more flexible modes of entry. The
majority of FDIs are also referred to as a non-trading entry choice con-
nected to the opportunity to offshore production and upstream activities
in order to save costs, but also to the aim of acquiring a global dimension
in oligopolistic markets.
An International Expansion Through FDI1

Ferrero’s internationalization strategy has old roots. Founded in 1946, the
company saw rapid growth in Italy via its indirect distribution channel. In
fact, from the very beginning, the Ferrero family preferred to focus on
product research and development. From 1946 to the early 1950s, Ferrero
gained market share in national territory, achieving an oligopolistic posi-
tion. In accordance with the theory of market power (Hymer 1976), domes-
tic surplus profits were invested in the internationalization process.
Ferrero’s global success is based on the profitable choice and implemen-
tation of competitive strategy. To increase its edge, Ferrero decided to focus
on setting its products apart, in accordance with Porter, thus choosing a
very precise strategic positioning. All consumers perceive Ferrero as a brand
of great quality and tradition, showing great confidence in it and recogniz-
ing a premium price in comparison with its competitors. This strategy was
adopted by Ferrero in the internationalization process. The prevailing entry
mode is FDI and greenfield investment. The company preferred to adopt
this entry mode in order to preserve its know-how, by maintaining a very
high level of control over resources. In this way, it has used its organiza-
tional skills, corporate culture, and production processes as a competitive
factor. To implement this strategy, the company has endured high costs in
fixed assets—offset, however, by the success of the internationalization
processes.
Ferrero’s first foreign plant was established in Stadtallendorf, in Hesse,
Germany, 150 kilometres from Frankfurt. Ferrero’s geographical expansion
was to see the opening of a factory in France in 1960, through the creation
of a subsidiary called Ferrero France. In both France and in Germany, the
logic behind Ferrero’s internationalization choices was quite clear: to
choose input methods that enhance the competitive advantage and know-
how in production, while leaving distribution to local distribution channels.
In keeping with this logic, in 1963, the Frankfurt plant was renovated with
a new greenfield investment bringing the number of workers to 3500.
Meanwhile, Ferrero’s products came to reach 80% coverage of the German
commercial distribution network. In the second half of the 1960s, eight
other European subsidiaries were to be established, bringing Ferrero prod-
ucts to Belgium, Holland, Luxembourg, Denmark, Sweden, Switzerland,
and Great Britain. Production was not to be relocated to these countries,
1
This case study, and in particular the prospective analysis on Malaysia, was elaborated by
the students in the master’s-level course in international management at Parthenope
University of Naples: Antonio Chiaro, Carmine Esposito, Raffaele Gallo, and Vincenzo
Valentino. It has been revised and updated by the PhD student Andrea Caporuscio.
but only marketing and distribution activities. Meanwhile, from the stand-
point of research and development, Nutella, the hazelnut cream that would
become one of the world’s most important products and brands, was cre-
ated in Italy in 1964. Confirming its international vocation, the brand was
modified in 1968 into Kinder (from the German word for “child”) and
Ferrero.
In 1969, Ferrero’s international expansion shifted its horizons to the
United States. Given the very different characteristics of the American
market, Ferrero decided to enter in a different way, that is first with a sales
office, to learn the lay of the land. Then, after finding considerable success,
Ferrero implemented continuity with the entry modes used in Europe, that
is a greenfield investment. In 1980, in order to coordinate the many subsid-
iaries present in the world, Ferrero International was founded in
Luxembourg. This choice was justified not only by reasons of a strategic/
managerial nature: Ferrero turned out to be an importer of Turkish hazel-
nuts, which have characteristics very similar to Italian ones. Although hazel-
nuts are a fundamental raw material in the production process, Ferrero has
not used upstream vertical integration because its high bargaining power
allows it to develop very close synergies with local producers. In 1988, the
Belgian and Spanish subsidiaries were established, in addition to a green-
field plant in Aarlon, Belgium. From 2009 to 2012, FDIs were made in Russia,
India, and Australia. The year 2012 saw a strategy change, through the
acquisition of hazelnut-producing MNCs in Turkey and the Caucasus.
Ferrero’s success in the American market led the company to set up a new
factory in Mexico worth €230 million. The year 2014 saw the acquisition of
the Turkish company Oltan, a world leader in hazelnut production. In 2015,
Ferrero bought the British company Thorntons.
At the start of 2015, Ferrero had 20 plants in the world. The only major
market without an internationalization project was China, and Asia more
generally. In May 2015, 400 kilometres from Shanghai, Ferrero opened its
first factory in China. With an initial investment of €100 million and 300
workers, Kinder Merendero, Ferrero Rocher, and a few other products were
made. With a step-by-step strategy, Ferrero focused on repositioning its
products in China, due to the presence of competitors such as Mars China
and Mondelez China. Ferrero first chose to enter the high segment of the
chocolate market. This strategy allowed it to penetrate with new products,
reaching a 20% share in 2017, second only to Mars China with 40% (China
Market Research Group). Given the economic importance of China in the
global scenario, in 2017, Ferrero decided to invest in Singapore through a
greenfield investment in a centre for innovation and development. This
centre is located in a district specialized in the development of raw food
material for nutrition and consumer health. This investment is consistent
with the differentiation strategy; the China Market Research Group says
that the Swiss chocolate brands have not invested enough in positioning
their brands in China, and have therefore suffered from competition by
Ferrero and Mars in a high market segment dominated in Europe by such
brands as Lindt.
As a further path of expansion in the Asian market, a new greenfield
investment, in keeping with the Ferrero strategy, may be imagined in
Malaysia. The Ferrero plant in Shanghai produces to a large degree Ferrero
Rocher and other Kinder snacks, but not Nutella, which is still exported
from Italian factories. For this reason, a new plant making this product in
Malaysia may be imagined. The choice of Malaysia is due to reasons relating
to macro and micro factors. Indonesia and Malaysia are the world’s top-two
palm oil producers (World ATLAS statistics by country), and Indonesia is the
world’s third-largest producer of cocoa. From a geopolitical perspective,
Malaysia is a stable parliamentary monarchy, which maintains very close
business and economic relations with neighbouring Thailand, Indonesia,
and, above all, China. From a commercial standpoint, Malaysia belongs to
ASEAN (Association of Southeast Asian Nations: Singapore—Thailand—
Malaysia—Brunei—Vietnam—Cambodia—Indonesia—Philippines—
Myanmar—Laos), an association of ten nations aimed at promoting the
free market without customs duties. The ASEAN+ 3 agreement was later
approved, extending the agreement to Japan, China, and South Korea.
According to Dunning’s eclectic theory, Ferrero can exploit the location-
specific advantages and excellent business relationships with China and
Indonesia; low raw material costs and a strategic position allowing the costs
of transport and product distribution to be minimized; and a potential
expanding demand. The ownership advantages concern the brand, the
range of products, the technological know-how and the managerial skills.
The target market remains the Chinese one, with its growing GDP, that can
be reached through Malaysia’s most important port, Port Klang. The choice
of producing in Malaysia and then exporting the finished product to China
is justified by the proximity of the most specialized raw materials and
converters.
An acquisition of a plant in Malaysia to reduce implementation time may
also be imagined; however, the only two times when Ferrero chose the
brownfield investment route involved two companies, Britain’s Thorntons
and Turkey’s Olton, which both boasted high technological standards. In
Malaysia, this type of technology is not widespread. In addition, according
to the World Bank’s 2018 ease of doing business rankings, Malaysia is 8th in
the world in energy resources, 4th in the protection of foreign investment,
11th in dealing with construction permits, and 20th in access to credit. For
these reasons, Nutella’s entry through a greenfield FDI would be more
efficient.
The rationale behind the creation of FDIs is the same referred to for
integration: the company grows in size in order to be present on the learn-
ing market, so as to reach a global dimension or preserve its competitive
position by eliminating competitors from the market. Acquisition is the
driving force behind the dimensional development processes of automotive
companies; it is a strategy different from that of the Italian-made textiles/
clothing industry, where the acquisition of competing firms and brands
often responds to the logic of eliminating competitors from the market. In
the scheme proposed at the beginning of the chapter, the creation of Wholly
Owned Subsidiaries (WOSs) is considered as a different form of integra-
tion. The FDI can consist of a greenfield or a brownfield investment, but
the point is they maintain strong control over the offshored activity.
Apart from the creation of its own business, FDI can also be achieved
through the acquisition of pre-existing shares of companies. In the first
case, the transaction is riskier: in the case of capital outlay, the risk is that
the investment is not profitable due to lack of demand, inability to hire
adequate human resources, delays in building the facility, technical prob-
lems related to the structure or to the production system, possible delays
in obtaining approvals, licences, and certifications. Investment times
grow longer and expose the company to additional risks associated with
bureaucracy and the country’s regulatory and institutional system (Dikova
and Van Witteloostuijn 2007).
Within FDI, participation in the ongoing privatization processes in
emerging countries offers interesting opportunities (Cannavale 2008).
Several authors have in fact stressed the potential benefits of foreign
investors’ participation in the privatization processes of large state-owned
enterprises (SOEs) and the opportunities arising from the exploitation of
the tangible and intangible resources these SOEs possess, as well as the
ability to develop, through collaboration with state managers, greater
knowledge of the local market, and to overcome the difficulties of lack of
information through the relationships investors have with other local
operators (Czinkota et al. 2002; Rondinelli and Black 2000; Spicer
2000). New businesses also have the first human resources employed in
large SOEs—specialized technicians accustomed to far lower remunera-
tion than those expected for employees with equivalent qualifications in
advanced countries (Djarova 1999); international companies therefore
have the possibility of offshoring knowledge-intensive activities as well as

mature technologies, of exploiting the cost-effective benefits of attacking
new demands, and of improving their position competitive in advanced
markets (Rondinelli and Black 2000; Kedia and Julian 1995).
Collaboration with SOEs and participation in ongoing privatization
processes can also be a necessity: in some emerging countries; it still rep-
resents the only opportunity to penetrate local markets, because of the
extra taxes and bureaucratic difficulties imposed upon wholly owned for-
eign enterprises (WOFEs). In these same countries, however, investors
should value the lack of managerial and marketing knowledge, given the
strong protections SOEs had before the start of transition (Czinkota et al.
2002).
Privatization plans and attitudes of local institutions change, however,
from country to country. In order for the foreign investor to succeed, the
involvement of the foreign enterprise must be perceived by the internal
players as a win–win process, that is, as a profitable agreement for all the
stakeholders involved foreign affairs, local government, and privatized
enterprises. However, the risks associated with such operations must not
be neglected: in many countries, there are still strong adversaries to the
entry of foreign operators, especially in areas considered strategic for the
country’s economic development; public opinion, also weary of the sacri-
fices connected to the economic downturn of the early years of the transi-
tion, is in some cases opposed to complete privatization, and this impels
local governments to preserve the social content of certain activities
(Czinkota et al. 2002; Rondinelli and Black 2000). In these areas, gov-
ernment policies are geared to maintaining strong control over entrepre-
neurial activities, strong investment is required for the participation of
foreign entrepreneurs, and the risk of nationalization is greater.
Opportunities for Privatization: An Experience in the Household

Appliance Industry
The Z Appliances company, later Z, was founded in 1975 by an Italian family
company that was one of the leading European manufacturers, occupying
a leading position in the world of household appliances for many years.
Starting in the 1980s, the Italian company embarked on its own interna-
tionalization strategy, emerging first on the British market, and then on the
French one. The position on foreign markets has consolidated as a result of

the acquisition of quality brand labels, and today Z pursues a dual market
policy: on the one hand, it is present on international markets with its own
historical brands, on the other hand, it works in a regional perspective,
preserving the leadership of the most important acquisitions.
The multibrand policy pursued by the company is characterized in all
markets by respecting quality and the pursuit of innovation in Household
Appliances; Z was in fact the first company to apply digital technology to
home appliances and Internet connections. The strong orientation towards
quality is also attested to by the philosophy pursued by the company’s lead-
ership, based on such values as product competitiveness, anticipating mar-
ket requirements, respect for and protection of the environment, worker
safety, and timely and transparent communication; all are indicative of the
importance attached to external relations.
Concerning the internationalization strategy in Central and Eastern
Europe, Z was one of the first European companies to invest in Russia and
the former Soviet Union. With the aim of greater productivity and effi-
ciency, the company has consolidated its presence in Russia and the sur-
rounding areas: today it has 10 commercial offices and over 300 service
centres in 150 cities in the country, and in 2005 it opened, in the industrial
district of Lipetsk, the first logistics pole in Russia, and the industry’s largest
in Europe. It also has a strong commercial presence in the Balkans and in
the other countries of Eastern Europe.
Z home appliances are also present in Turkey and China: in Turkey, since
1994, in the industrial area of Manisa with an establishment dedicated to
the production of top-of-the-line refrigerators. The plant produces about
1,000,000 units a year, a figure the company expects to rise to 1.2 million.
At present, the Manisa plant employs about 700 people and the number is
expected to grow in the coming months. Z Company has launched a pilot
project at the Manisa plant to define and implement an innovative occupa-
tional health and safety management system (OHSAS 18001).
In China, it has been present since 2005, when it signed a joint venture
with Wuxi Little Swan, China’s leading washing machine manufacturer.
Thanks to the experience of the related Z Progetti, which has built 25 indus-
trial plants in China, Z has gained solid credibility in the country. Z
Elettrodomestici used a phased approach, first implementing less complex
modes, usually by direct exporting; once more knowledge of the target
markets was acquired, it moved on to more complex modes, making provi-
sion for direct investment of a productive nature both in Poland and in
Russia.
The activities carried out in Central and Eastern Europe contribute 29%
to the Group’s turnover, which is why Central and Eastern European
Countries and the Confederation of Independent States (CIS) are currently,
according to the Z Group’s Director of Industrial Relations, one of the most
important markets for Z Elettrodomestici, especially in light of the local
development potential. The Group is present with its own representative

offices in Bulgaria, the Czech Republic, Romania, and Hungary, as well as in
Poland and Russia.
With regard to the activities carried out in the CIS, the director has shown
a high degree of satisfaction with the result of the investments made and
the potential for market growth, and has pointed out that the success of Z
Elettrodomestici in the area is based on long experience amassed in about
20 years of market presence, and the creation of an important network of
relationships.
Beginning in the early 1980s, Z Elettrodomestici implemented processes
of direct exporting to the Soviet Union for all its products, with the excep-
tion of those concerning the cold chain, the transport of which was exces-
sively burdensome; in the same years, Z Progetti was commissioned by the
Russian government to build a turnkey facility for S, a state-owned com-
pany specialized in the production of refrigerators.
With the start of the transition, the Italian company decided to intensify
its presence in the area and exploited the opportunities resulting from the
privatization process for offshoring the production of refrigerators: Z thus
purchased the majority stake in S for a $120 million investment, becoming
the largest investor in Russia for the year 2000. The operation has allowed
the Z Group to become the leader in the production and distribution of
refrigerators in all the countries of Eastern Europe; Z Elettrodomestici now
holds a market share of 36–37%, and, given the success achieved, the com-
pany has immediately planned the construction of new investments for the
on-site production of washing machines.
In particular, on its own, the acquisition of S accounts for 40% of the
Russian refrigerator market, and the company has decided to attack this
market exclusively with S and Z branded products, the latter being targeted
to the most demanding consumers characterized by greater spending
capacity. The investment has allowed the Italian Group to become the
leader in a market with a population of 280 million people, similar in size to
the European Union, but with a lower penetration and an obsolete product
range. Market growth forecasts, estimated at around 10% per year, have
been the main determinant of the investment by which the Home
Appliances Z aims to transform the Lipetsk plant into a pole of develop-
ment for the entire region.
The acquisition of S was favoured by the Italian group’s certainty as to the
quality and productivity levels of the plant, built in accordance with the
rules of other European countries; the work, however, was done about
20 years earlier, and some modernization of the facilities and a procedures
review was required.
The establishment’s operation has been entrusted to the same Russian
managers responsible for the activities prior to the privatization process,
but local management has been joined, over the years, by Italian task
forces, established from time to time depending on the goals to be achieved.

Responsibilities for industrial relations, however, remain in the hands of the
same people, in order to foster stable relations with local stakeholders and
to exploit, in the best possible way, the synergies created with local authori-
ties: the director has often been in Russia to study investment opportunities
and achievable location benefits, and to discuss the need for better infra-
structure with the local government.
Z aims at creating a kind of household appliance district in the Lipetsk
region, and it is favoured by the excellent relations the Italian group has
with local authorities, which, given the strong impetus given by the Italian
company to the area’s production fabric, are seeking to encourage S’s activ-
ity as much as possible: it is precisely for the purpose of reducing logistics
costs that the region’s government has undertaken to strengthen the trans-
port system and to plan a railway station near the establishment.
The director has stressed that the establishment of such a friendly climate
was determined by the long-term perspective of the Italian company oper-
ating in the area, in compliance with the safety and environmental stan-
dards used in the most environmentally regulated countries. The plants’
high quality has also encouraged greater involvement by local managers
and employees taking pride in the enterprise, thus developing a greater
sense of belonging to the company.
Scaling strategies are a compulsory choice when considering that the
Lipetsk plant produces the same amount of goods from the factories
located in the South of Italy but with ten times more employees; the group’s
choice was, however, not to reduce the number of employees immediately,
and not to plan layoffs, given the Italian management’s awareness that
maintaining employment levels was a sine qua non for creating stable,
trust-based relationships with local stakeholders. On the other hand, Z
Elettrodomestici, by keeping the number of employees stable and offering
slightly higher salaries than average, took advantage of the opportunity to
keep the best staff while minimizing employee turnover.
The director emphasized how the training of employees was not at all
burdensome, as Z Progetti had arranged training courses for the optimal
use of the plants at the time of establishment. Upgrading them has made it
necessary to upgrade courses, and doing so has not presented particular
difficulties.
More complex was the selection of framework and management levels.
In the first phase, no change was made; the group’s HR manager found
that, with S, there were about 80 first- and second-line managers and spe-
cialists who, in many cases, had obtained career advancements based more
on politics than on merit. The confirmation of all the present management
has allowed the group to more deeply examine the issues related to person-
nel management, and to study solutions suitable for fostering alignment
between the managerial skills of local operators and the Italian company’s
standards. The three months after the acquisition were of use to the Italian
task force for improving the organizational chart and for better attributing
tasks and responsibilities. Evaluation criteria were used for the final selec-
tion of potential managers, specialists, and young people.
The evaluation involved a team of psychologists at the University of
Lipetsk, who before commencing the activity spent three days comparing
notes and getting into sync with the Italian consultant as regards method-
ology and content, after which they provided each of the candidates with a
questionnaire and organized a role play and individual interview for them;
the results were translated into Italian by a group of five translators.
The evaluation process has led to the identification of 400 people eligible
to be held accountable, some of whom already occupy first- and second-tier
assignments, while others had the benefit of age (less than 35 years), along-
side 200 graduates.
The Italian consultant’s supervision, which has long been used in the
group, allowed staff assessment and training to be carried out in accor-
dance with the principles of corporate philosophy, and the group could also
take advantage of the first comer’s human resource selection. In fact, in
2000, other foreign investors in the area were few, and Household
Appliances was the first company to make a long-term investment.
In 2004, the Z inaugurated a new washing plant production facility and in
2005 built a new logistics centre; this allowed the group to become the
largest manufacturer of home appliances in Russia, where it ended up con-
trolling 36% of the local market.
Z’s industrial base in Russia is therefore composed of two factories—one
for refrigerators and one for washing machines—and a logistics pole; local
production covers about 70% of the sales and the remainder is imported,
mainly from Z’s factories in Poland and Italy, with Turkey accounting for a
more modest share.
As far as Russia alone is concerned, Z has been present in the country
since 1993, the year the first commercial office opened in Moscow. Over the
course of a few years after 1993, offices were opened in Russia’s largest cit-
ies, like St. Petersburg and Vladivostok, as well as in the capitals of some
states of the former Soviet Union, such as Ukraine and Kazakhstan. Today,
the Russian sales network consists of five representative offices, which
allow it to operate in the different time zones, and the logistics centre can
handle at least three million pieces a year.
The good prospects for the development of the local market and the
geographically close areas are leading the Italian group towards a policy of
attraction from other Italian companies: the ability to attract on-site Italian
sub-suppliers would not only allow Z to locate the services where the spe-
cialists are needed, and thus to streamline the production process, but
would also contribute towards further improving relations with local stake-
holders, which are hoping for new capital and new knowledge. Such initia-
tives, however, do not appear to be very successful, because of the low

propensity of many Italian entrepreneurs to invest in countries where risk
levels are still high.
The new production asset and increasing market share have made Z so
attractive that a world leader in home appliances acquired it in 2014.
Cooperative Modes
Cooperative modes of internationalization are largely employed today to
preserve flexibility and specialization, understood as strategic levers for
firms’ competitive advantages. They are no more specific than small firms,
and MNCs use more and more joint ventures and strategic alliances in all
situations where the risks associated with FDI would be too high.
Successful cooperation requires managers to be oriented towards learning
from their partner and towards sharing their knowledge; they must adapt
their competences to the best of their counterparts (Kauser and Shaw
2004). They also have to try to position their skills at higher levels of
learning, so that they know not only how to approach and interpret envi-
ronmental phenomena but also how to seize opportunities in an increas-
ingly changing context, without taking on all the risks. Alliances indeed
offer important advantages (Simonin 2004; Meyer et al. 2009): partners
share the risks of the investment and can accumulate their knowledge,
thus creating synergies between the market and technological knowledge.
Costs are limited, and firms can exploit the advantages of the systemic
and dynamic relational network. Working together, firms aim to achieve
a defensible competitive position on international markets, and are
encouraged to develop learning, innovation, and, above all, market cre-
ation opportunities that occur where synergies can be exploited (Teubal
et al. 1991).
For SMEs, above all, alliances expand the strength of a single business
unit, and this expansion allows each component to withstand scientific–
technological challenges, massive investment, and competitive risks,
which are inaccessible (Vaccà 1990). In this context, the internationaliza-
tion process is developed not so much by the individual enterprise, but
by a multiplicity of actors linked to one another, and the level of risk

associated with the start-up of an international development process—
closely linked to financial, technological, and organizational skills, as well
as to information costs—declines. Cooperation also lays the groundwork
for reducing uncertainties stemming from entry into non-family or
unknown business. The sharing of skills generated through networking
seems, in such conditions, to become a more rational solution to the
problem.
The process of internationalization of business activities through the
development of cooperation agreements is a phenomenon that has been
accentuated and distinguished over the last few decades by the intensity
and the broad spectrum of the various forms that have developed among
businesses. This is why business collaboration can no longer be consid-
ered as an intermediate form between hierarchy and market, or as a
second-best choice. Not least, they represent an intermediate phase of the
internationalization process for the enterprise that evolves from entry to
a foreign market through export to direct investment forms, passing
through transitional forms, oriented towards agreements with interna-
tional partners.
In this context, cooperation agreements represent a targeted choice
based on and inspired by the structural and competitive characteristics
and specificities of the international market, the characteristics of the
products and technologies, the capabilities, the organizational structure,
and the dimensions of the as well as the conviction that cooperation is a
viable way of achieving competitive advantages and benefits in line with
the vector of international growth. Therefore, for the enterprise, coopera-
tion agreements are a flexible organizational form for access to markets
with broader horizons, new technologies, more convenient supplies, and
new outlets to face a competitive clash that has now become increasingly
global.
Looking specifically at strategic alliances, these can be connected to
marketing-sales and after-sales services, or to production and R&D. R&D
alliances allow co-ventures to reduce the risk of exploration of the “new,”
and may permit the ingenuity of innovative ideas in the event of the pres-
ence of capital-bound partner alliances. Alliances can also involve pro-
duction and productive coalitions, and above all asymmetric alliances,
offering partners the possibility to increase their knowledge and foster

innovation, so as to create a higher barrier to the entry of new competi-
tors. Alliances of this kind, in spite of their complexity, are replacing the
simplest, “old” forms of licensing and patents.
Forms of marketing, distribution, and after-sales agreements are often
the result of a more complex collaboration than a technical–productive
alliance. The aim of this cooperation is to develop synergies among the
specific business skills of companies, especially if partners work in local
areas characterized by different behaviours and cultures. With regard to
the increase in organizational and managerial complexity, which is
reflected by the transition from the simplest forms of collaborative typol-
ogies to strategic alliances, it should be noted that in trade-oriented
forms, current market transactions may include types of offsets or trian-
gular compensation agreements that require complex deals and the long-
term involvement of partners in the agreements. It should also be noted
that these business cooperation relationships, even in the most complex
forms, remain within the scope of typical countertrade transactions; they
are resolved in the performance of the obligations deriving from the con-
tracts governing the relationships, which represent the very essence of
transactions.
Countertrade
The simplest forms of business collaboration agreements are those of a
contractual nature, in which the relationship between partners remains
bound by legally sanctioned rights and obligations. The formal agree-
ment derives from the specific performance provided by the contract that
represents the transactional relationship’s very reason for being.
Countertrades—in their various forms, such as Barter, Counter-
Purchase, buyback, Offset, and Turnkey investments—are often used to
enter developing and emerging countries, above all when barriers to
international trade exist. In this regard, however, it should be noted that,
in the face of high usage of countertrade from major developing coun-
tries, by the end of the 1980s, the transformations occurring in Eastern
Europe and the evolution of many third-country exporters (e.g. Indonesia

and Malaysia) have much reduced the use of this tool in favour of mon-
etary payment techniques (Forker 1996).
The factors that contribute to the expansion of the phenomenon are
obviously to be sought in the specific situation of each country, such as
indebtedness, limited availability of currency, non-convertibility of the
local currency, and the need to develop local industries. The main reasons
forcing companies to use countertrade in international commerce must
be broken down into several categories:
–– Market reasons explaining countertrade use in terms of increased sales,

consolidation of market shares, entry into new markets, and taking
root in regional markets where they had no previous experience;
–– Logistical reasons in the sense that countertrade can be used by com-
panies that want to rid themselves of surplus stocks of raw materials
and finished products;
–– The search, in strongly integrated companies, for constant conditions
of convenience in the supply of cheap raw materials against payment
in finished products (Lecraw 1989); and
–– The attempt to overcome barriers to entry or export in some markets.
The reasons of convenience that may encourage developing countries

to use a countertrade may also be based upon:
–– Overcoming international price agreements, since the payment of the

commodity does not have direct effects on the market price, which is
thus not affected by such transactions (Hennart 1990);
–– Overcoming trade controls, such as payment of goods against goods,
makes it easier to overcome customs controls often imposed on certain
types of goods.
However, access to countertrade forms is not risk-free. For Pellicelli

(1990), countertrade increases the risks and costs of transactions, as trad-
ing requires both longer information gathering times and the presence of
specialized brokers. In addition, for that author, the development of
international exchange would also be hindered, because when a country

imposes countertrade trading on the seller, other countries lose market
share and are motivated to do likewise: renouncing experiences on for-
eign markets would reduce the possibility of expanding exports.
Beyond the macro-level disadvantages, for entry into some countries,
and especially for currencies that are non-convertible and have difficulty
obtaining financial resources, the countertrade represents one of the few
easy-to-use modes at lower risk.
There are several types of countertrade, from the simplest, compen-
sated, and contracted, to the most complex, buyback and offset. In gen-
eral, the logic underlying a countertrade contract provides for an
agreement involving the transfer of tangible or intangible assets as a con-
dition for the purchase of goods and services (Pellicelli 1990).
The simplest type of countertrade is offset, considered the most cur-
rent variant of barter with the introduction of a value, expressed in cur-
rency, of the traded goods. It may also include a transferable currency
movement (partial offset) by the foreign customer, to partially cover the
value of the goods imported by the primary exporter.
The contract, which regulates the reports, shows the characteristics of
the goods to be exchanged, the prices, the quantities, and the duration of
the transaction, generally short.
Foreign customers (or secondary exporters) are, in general, companies
from less developed countries, and since export flows from foreign cus-
tomers can be divided by the maximum time established in the contract,
it is often necessary, as a guarantee for the entire operation, for a trustee
bank to intervene in the compensation, with the task of “memorizing”
the transactions of exchange between the operators in specific clearing
accounts, while highlighting the credit and debit relationships of the par-
ties that arise upon the various deliveries of the goods. The currency in
clearing accounts—which are basically accounts opened for the partners
in the agreement (“their” accounts) and report the credits and debts that
arise whenever an export flow is made from one partner to another—is to
be considered soft currency. Generally, the counterpart products are not
“familiar” to the primary exporter, which may not have the necessary
knowledge for their marketing: in this situation, a commercial intermedi-
ary, often a trading company, gets involved in the transaction and sells
the counterpart products on international markets in order to have the

money for the primary exporter while keeping a percentage for itself.
Counter-purchase is the most common form of compensation, espe-
cially in Asian countries. In this case as well, the primary exporter agrees
to receive, in partial or total payment for its supplies, the goods of the
foreign customer, often presented on special lists; however, unlike what
happens in barter and compensation in the strict sense, the counter-
acquisition involves the drafting of two separate and parallel contracts.
The first contract concerns primary export, and all the characteristics of
the supply are reported; the second one concerns the commitment of the
primary exporter to purchase the partner’s products, and establishes only
the counter value and the type of goods that must constitute the supply
to be counter-bought (or the types indicated in a pre-established list). As
a consequence, the foreign client in charge of selling counter products,
has a big advantage and can exploit moments when commodity quota-
tions are high to send a smaller amount of goods.
There are various reasons that may encourage an operator in industrial-
ized countries to accept a counter-purchase as condition for its exports;
this occurs, for example, in cases where an incorrect programming of the
production to be marketed has been carried out; the products are obso-
lete for their own market, and the counter-purchase is used as the first
instrument of entry into markets not easily penetrated through more
consolidated methods, such as exports.
The switch originates, generally, when bilateral agreements have been
put in place between the countries (Clearing Agreements). The bilateral
agreements have a contractual nature and provide for the formulation,
for each country that is party to the agreement, of lists of products (or
services) exchanged between the parties, valid for a certain period of time.
The lists show, for each country, the type of goods accepted in the
exchanges, and the total value admitted to the exchange, segmented by
single export flow and by maximum value accepted for each flow.
Upon the expiry of the period established in the Clearing Agreements,
the uncompensated balance must be paid in a hard currency, and this
condition clearly shows that the presence of a bilateral agreement creates
the conditions for the entry, in compensatory transactions, of third-
country operators.
The supply of “turnkey” plants, machinery, and equipment of high

value: the primary exporter receives in return, in partial or total payment
of the supply, the goods obtained from the plant or from the machinery
sold by it.
These operations are differentiated from other, more strictly “commer-
cial” compensatory transactions, because they arise from a broader
intergovernmental agreement, involve entities of international impor-
tance, and entail significant contract values and long-term execution
times. There are also quite frequent cases in which the transfer of tech-
nologies is accompanied by the establishment of an equity joint-venture
between the foreign customer and the primary exporter, aimed at manag-
ing the plant and marketing the products obtained from it.
Such agreements are often used in the oil industry, but above all in
cooperation with industrializing countries, since the productive coali-
tion is often forced by necessity to obtain legitimization from the local
government authority to operate in the host country: the benefit derived
from this form of agreement is implicit in the facilitation offered by the
host country, which makes these forms of internationalization less
expensive than other modes of entry into the local market (Valdani
1991).
The use of countertrades may appear to be of little benefit to compa-
nies in advanced countries, and yet it is possible to identify a number of
reasons why these companies use various forms of countertrade:
• Market reasons explaining the use of countertrade in terms of increased

sales, consolidation of market shares, entry into new markets, and tak-
ing root in regional markets where no previous experience has been
gained
• Logistical reasons, in the sense that the countertrade can be used by
companies wishing to free themselves from the surplus of stocks of raw
materials and finished products
• The search, in highly integrated companies, for constant conditions of
convenience in the procurement of cheap raw materials against pay-
ment in finished products (Lecraw 1989)
• The attempt to overcome entry or export barriers in some markets
he Role of the Institutional Context

T
and of Market Commitment in Firms’ Entry
Choices
While entry choices can have different natures and take on different levels
of financial and organizational involvement, they represent a key compo-
nent of internationalization strategies, and different theoretical and
empirical studies have focused on this issue (Shaver 2013). Various schol-
ars, in interpreting this choice, have obtained different results, and
empirical evidence is not easy to interpret and revise (Cannavale and
Laurenza 2017). This field of research owes its origins to three main back-
grounds: economic theories, theories of FDI, and internalization theo-
ries. However, the recent trend has been to adopt a more eclectic approach
and to involve strategic and behavioural variables as well. The traditional
contributions made for entry mode focus on transaction costs theory
(Williamson 1985, 1991), on monopolistic advantage theory (Hymer
1976), on internalization theory (Buckley and Casson 1976a, b), and on
Dunning’s eclectic paradigm (1979). These contributions consider the
foreign investment decision as a rational process based on the costs and
advantages of outsourcing activities in foreign markets. More recently,
contributions have referred to the resource-based perspective (Meyer
2001) and focus on firms’ ability to move and to strengthen both internal
and external resources and capabilities, which are rare and difficult to
imitate or substitute (Barney 1991, 2002). According to this line of
thought, the decision to internationalize is based mostly on internal fac-
tors, and on the quality and quantity of resources and competencies.
However, a strategy is the result of an internal and external analysis: both
environmental and firm-specific factors are important in deciding strate-
gic goals, and also in choosing the right way to attain them (Hill and
Westbrook 1997). When the strategy is an internationalization strategy,
external and internal factors are important for deciding where to invest,
and what kind of investment the firm should make. A new input to the
interpretation of firms’ entry choices derives from application of institu-
tional theory, and from the consideration of cultural values as something
affecting international relationships and managerial practices (Brouthers
2002; Arregle et al. 2006; Brouthers and Brouthers 2001). According to

the authors, entry choices are often driven by a combination of transac-
tion cost variables and institutional and cultural characteristics. All oper-
ations outside domestic boundaries involve interaction between different
systems of cultural and social values; moreover, including cultural vari-
ables in international business studies implies that cultural differences
between countries increase the costs of firms’ entry into host countries,
and inhibit the ability of companies to transfer knowledge and skills
(Palich and Gomez-Meja 1999).
However, literature on the topic is not thorough, above all because
previous studies focus on MNCs, or use the same theoretical framework
to explain SMEs’ entry choice in foreign markets. SMEs show particular
characteristics that can influence entry choices in international markets:
the lack of financial resources, and ownership and management features
that seem to affect the level of resources committed and the degree of risk
SMEs can afford in internationalization process. Furthermore, some
studies point out that frameworks developed for MNCs are not always
able to explain SMEs’ choices, above all in situations of high degree of
uncertainty and external pressure (Erramilli and Souza 1995). These
studies suggest that the institutional context is suitable for explaining
SMEs, because of SMEs’ sensitivity to react to external challenges and
because of their resource scarcity (Brouthers and Nakos 2004).
Cannavale and Laurenza (2017) contribute to this debate, focusing on
two main factors: (a) market commitment, intended as the incremental
and sequential commitment of a firm to foreign markets (Millington and
Bayliss 1990; Luostarinen and Welch 1990) and (b) the institutional con-
text, which is considered welcome or hostile according to the evaluation of
five factors: (1) the extent to which local regulatory influences the activities
of foreign firms in the host country (the extent to which the state hinders
the development of business); (2) state control (the extent to which the
control exercised upon companies distorts competition); (3) restriction on
investment (the extent to which investment in the economy are directed by
the government); (4) the bureaucracy of local government, protectionism,
and fiscal policy; and (5) the cultural barrier meant as closeness to outsiders
and unequal treatment of foreigners (the extent to which foreigners are
treated unequally compared to local citizens, and cultural boundaries).
The authors state that, above all for SMEs, entry choices depend on
the institutional environment and on market commitment. The institu-
tional environment can represent a limitation on firms’ entry choices
above all in emerging markets and economies in transition. However,
firms’ action not only depends on external factors alone but also on the
extent of firms’ involvement in international activities, and on their pre-
vious experiences (market commitment).
Relying on the institutional literature (DiMaggio and Powell 1983;
Kostova and Roth 2002; North 1990; Ferreira et al. 2009; Peng et al. 2008;
Scott 1995; Amburgey et al. 1996; Oliver 1996; Schwens et al. 2011;
Cheng and Yu 2008; Li and Peng 2008; Demirbag et al. 2007; Meyer et al.
2009; McMillan 2008; Delios and Beamish 1999), Cannavale and Laurenza
(2017) distinguish the countries covered in the analysis as hostile and wel-
come. They consider as hostile those countries, which are less open to for-
eign investments, with demanding and very strict tax regimes. Considering
the transitioning markets, these countries are generally high-context cul-
tures, where Westerners are perceived often as culturally distant, and some-
times as a threat (Calza et al. 2009, 2010, 2013). To the contrary, they
consider as welcome countries those where the tax regime and the interfer-
ence of governments are mild, and authorities encourage and attract for-
eign investment by introducing a number of exemptions and reducing state
holdings. Culture does not represent a barrier, and interaction with part-
ners and local stakeholders is much easier because cooperation with foreign
company is seen as an opportunity more than as a risk.
To suggest the right entry choice, scholars combine the kind of context
with market commitment. Commitment is a broad concept including ele-
ments of psychology, attitude, and time (Gundlach et al. 1995). Therefore,
market commitment involves not only resources but also the attitude or
intent of the decision makers (Lamb and Liesch 2002). Market commit-
ment influences entry choice, because different choices imply different
cost levels, risks, and involvement, and require different degrees of knowl-
edge and experience (Bilkey and Tesar 1977). It may concern the inclina-
tion to build strategic alliances (Cullen et al. 2000), business-to-business
relationships (Zabkar and Makovec Brencic 2004), and cross-border rela-
tionships (Styles et al. 2008).
According to the Uppsala School, internationalization is the result of a
company’s gradual awareness of the opportunities in foreign markets. This
vision is based on the strategic role of intangible resources and learning:

the firm’s transition from a limited exploration of international markets to
a high degree of international commitment depends on the acquisition of
resources (Kuivalainen et al. 2012, p. 448). International experience has a
great influence over the decisions on mode of entry. At the start of the
internationalization process, companies do not have enough experience,
and perceive high uncertainty (Johanson and Vahlne 2009). Following
this approach, the authors distinguish high market commitment, under-
stood as the firms’ aptitude towards investing resources in foreign mar-
kets, from low market commitment, understood as the search for spot
opportunities connected mostly to sales performance.
According to the proposed framework, Cannavale and Laurenza
(2017) essentially hypothesize that where contexts are hostile and com-
mitment is low, firms try to limit the risks derived from high institu-
tional uncertainty and low experience, and the entry choice is expected
to imply low involvement of resources, for example, by indirect export.
On the contrary, if contexts are welcome and market commitment is
high, firms are inclined to stay in the host market for a long time and
to choose a stable and long-term oriented mode, such as FDI. When
contexts are hostile but commitment is high, firms can decide to seek
first-mover advantages, but the risks encourage them to limit involve-
ment of resources; alliances or joint ventures are the most suitable
modes, and there will be partnership. Last but not least, when commit-
ment is low but contexts are welcome, firms can act in a learning per-
spective, and use the host markets to consolidate their knowledge.
Entry choices will be connected to trade opportunities, and firms usu-
ally transition from less complex competitive modes, such as direct
export, to more complex cooperative modes such as marketing and
sales joint ventures.
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4
Outsourcing and Reshoring
hoices of Outsourcing to International Third

C
Parties
Outsourcing activities to international third parties is a way to imple-
ment international development strategies. More specifically, it is a way
to implement internationalization strategies for expansion when outsourc-
ing is done in markets culturally close to the domestic ones, and for diver-
sification when outsourcing is carried out on markets distant from the
domestic ones.
As early as the 1980s, studies and research focused attention on sub-
suppliers and on the benefits they brought in terms of greater efficiency,
reduction of sunk costs, and improved access to specialist knowledge. In
particular, starting in the last decade, US companies began, en masse, to
pose the dilemma of “sourcing”—which is to say finding the best way to
procure factors and services. The problem was particularly felt for the area
of the information system (IS); the processes of partial or total outsourc-
ing of the IS involved numerous large companies in the various sectors,
starting from the pioneering decision by Eastman Kodak, which made IS
outsourcing contracts with IBM, Businessland, and DEC.

https://doi.org/10.1007/978-3-319-91551-7_4
The disintegration (vertical and horizontal) of the business activity,

especially in large conglomerates, was also triggered by the shortcomings
due to structural factors that created both high costs for managing
insourced activities, and difficulties in being able to effectively and effi-
ciently govern corporate complexity. It was also caused by factors of
external change (technological innovations, harsher competition) that
required an organizational downsizing necessary in order to acquire bet-
ter competitive positions.
In addition to its faster growth, what sets the current outsourcing
trend apart is the wide variety of configurations it has given rise to. Major
corporations are on the continuous lookout for new outsourcing oppor-
tunities and the types of activities that are outsourced have also changed;
no longer confined to the traditional activities of the tertiary sector
(transport, distribution) or to processing phases generally with mature
technology, they now extend to complete business processes, to the
entire supply chain, and, in high-tech companies, to research and devel-
opment as well.
The “forms” of outsourcing also differ significantly from the traditional
purchaser/seller relationship, and crowdsourcing bears clear witness to
this.1
The globalization trend in business activities has contributed towards
developing these new processes. In pursuit of the ubiquity of competitive
edge, this trend requires managers to devote more attention to not wast-
ing internal resources on activities that do not help positively increase the
wealth of knowledge accumulated in-house, while channelling these
resources towards activities that can better develop the entrepreneurial
“vocations” and the core factors.
By generating a relational system of knowledge exchanges, the new
forms of outsourcing can offer not just the benefits of optimum control
of resources by concentrating them on the core activities, but also the
advantages of an increased ability to rise along the accumulated learning
curve.
1
In crowdsourcing, the performance of activities in the value chain (design, solving technical ques-
tions, building a new product or carrying out a new service, etc.) is sourced to the outside, to the
“crowd” of virtual communities present on the web. Some sites also have the purpose of placing
companies and professionals in contact with one another.
Outsourcing and Reshoring 113
eterminants of Outsourcing Choices:

D
Beyond the Theory of Transactional Costs
In the classical economic theory of competition, the price mechanism is
the element that ensures the best allocation of resources and the most
efficient mode for negotiating the economic relationships among the act-
ing parties (Cafferata 1995). From this perspective, price is a datum out-
side the environment that cannot be controlled by companies, as if
companies were in no way able to alter market mechanisms through their
own decisions. From the standpoint of the economy of businesses, the
paradigms of classical theory show interpretative limits of entrepreneurial
actions; as early as Williamson (1975), the mechanisms and determinants
influencing decision-making processes already began to be replaced:
companies make choices not only depending on external, uncontrollable
variables, but also depending on the internal resources possessed and that
can be acquired. The price of the transactions compared with the costs of
internal implementation also enters into the decision-making choices.
The composition and level of resources that the company has been able
to create over time therefore help determine the choices between hierar-
chy and market.
In the theory of transactional costs, one may also glimpse a new variable
as a determinant for making decisions: the strategic objective aimed at
minimizing the costs for achieving comparative benefits—if not competi-
tive advantages—assessed through the economies of total cost (production
cost and transaction cost) that may be achieved in the various alternatives
(Williamson 1979). Therefore, a more dynamic role in governing resources
replaces the essentially static behaviour in which the company regulates
itself depending on the trends in such outside variables as market prices.
Currently, in an international market that is increasingly integrated,
competitive, and contentious, and given the increasingly expanding compe-
tition, the outsourcing choices of business activities should follow decision-
making criteria and mechanisms more focused on the impacts that every
outsourcing choice has on the lines of strategy to be pursued, and on the
projected ability to create value. These criteria, then, are more complex than
those set out by the theoretical conceptualizations of transactional costs.
In this regard, awareness must develop at companies that every outsourc-

ing choice, by significantly modifying the structure of the value chain, can
heavily influence the creation of long-term economic value, and therefore the
companies’ very possibilities of survival. This is for two categories of reasons.
In the first place, the value chain and the entire system it belongs to
may differ significantly depending on whether the individual activities of
reference include
–– the costs of the activities acquired from the outside, in the case in
which the company decides to rely on the market; and
–– the costs for the tangible and intangible resources acquired by the
company to develop a given activity internally.
Secondly, the contribution of the value chain’s activities to perfor-

mance, in terms of both positive returns and cost, may, in a static per-
spective, vary considerably depending on the strategic choices made in
the past and, in a dynamic perspective, restrict future choices in allocat-
ing the resources that are possessed.
These are issues that are rather neglected by the economic and corporate
literature, which essentially grounds its arguments on static comparisons
based on the costs to be incurred respectively in the various options of hierar-
chy and market, rather than on the expectations of the returns brought by the
two alternatives. Studies have been based essentially on the transactional
costs, neglecting other possible variables in explication that can lead to a more
dynamic vision of the appropriateness of insourcing or outsourcing business
activities. Research has, from time to time, emphasized particular condition-
ing elements, as general principles of the management economy of industrial
enterprises considered as a whole, or as particular aspects of the phenomenon,
characteristic only of specific sectors or of specific local realities.2
2
From the empirical verifications done on the issue of outsourcing, it emerged that a determinant
factor was the size of the companies: in small enterprises, even elementary activities are outsourced,
such as bookkeeping assistance or typing (Calvelli 1990). Empirical research (Tassinari and Vaglio
1989) has also highlighted that, in the presence of a stronger learning content more easily accessible
to specialized companies, the degree of transfer outside of them is accentuated; to the contrary, the
uncertainties related to the costs and the final specifications induce companies to insource activities
marked by greater unpredictability in terms of results and their effectiveness. In a perspective of
organizational change and with regard to the services in support of the business activities, some
studies (Mussati 1986) have found that companies generally show a trend to insource services
requiring complex contractual forms and excessively high flexibility in the delivery processes.
The considerations made above show the importance of preparing

more complex tools for the economic and financial analysis of choices—
tools that, in overcoming the static perspective of transactional costs
alone, are also suitable for interpreting not only the impact an outsourc-
ing choice has on the value chain but also the competitive advantages,
beyond pure cost levels, that can arise from the different choices.
Although there are many and at times contradictory points of view
with regard to the costs and benefits derived from the outsourcing choices
made on an international level, it may be stated that rational outsourcing
choices can create benefits in terms of corporate output corresponding
more with the expectations of demand, better positions to be achieved in
the competitive setting where the companies operate, and the develop-
ment of a greater load of innovation at companies.
These analyses take on greater complexity when they are done by the
parent company for decisions to outsource the activities of subsidiaries,
since, in this case, analyses must be performed that take account both of
the positions reached and planned by the associated companies, with ref-
erence to the particular competitive settings in which they operate, and
of the overall activities of the corporation, considered in a single systemic
vision.
Decisions to Outsource the Activities of Subsidiaries: Reference

Parameters
The following are the most important parameters that should be taken into
consideration in the corporations’ outsourcing choices.
1. The financial impact of the activities of the associated companies on the

value chain at the Corporate level.
2. The importance of the associated company in the context of the group,
in terms both of achieved performance and of future potential.
3. The associated company’s current and prospective competitive position
with regard to the environment it works in, taking account of the eco-
nomic situation and of the level of risk present in it.
4. The direct and indirect benefits (opportunities to be seized) that may
derive from the maintenance or development of the associated compa-
ny’s activities.
5. The opportunities not seized, in the case of outsourcing (income/oppor-
tunities) the associated company’s activities.
6. The compromise costs and the coordination costs to be borne in the

event that the corporation wishes to maintain or develop the activities
of the associated companies, taking account of the level of complexity
and of the impact these activities may have on activities and resources at
the aggregate level.
7. The possibilities derived from the development, within the company, of
the knowledge necessary to produce the activities it needs, in terms both
of expanding the activities already undertaken, and of applying the
insourced knowledge in new businesses to be undertaken.
8. The competitive advantages, beyond pure cost levels, that can arise from
the different choices, in terms of effectiveness, of higher barriers to
entry to be erected against potential competitors, and of the greater
market power that can be attained with regard to competitors, suppli-
ers, and customers.
A non-rigorous and partial assessment of the advantages that may

derive from an outsourcing aimed at seeking efficiency may lead to criti-
cal situations of competitive incapacity or even, paradoxically, to situa-
tions of lesser efficiency (downsizing can become “dumb-sizing”).
In the first place, for the outsourcing of business activities to develop
successfully, there must be producers capable of guaranteeing the mainte-
nance, over time, of the quality standards required by the customer at
marginal, non-growing costs. Only in this way, in a dynamic vision, will
it be possible to respect the efficiency parameters that guided the choice
of outsourcing and, at the same time, to limit the risks of underperfor-
mance that might compromise the corporate results, especially if the out-
sourced activity is “critical” for maintaining the company’s competitive
situation.
For example, the main problem Western companies encounter when
they decide to offshore their production to certain “difficult countries” is
linked to the procurement of raw materials and components: long delays
in delivery, and low quality of semi-manufactured items create lower
competitiveness of finished products on Western markets. Coming on
top of the procurement difficulties are the shortcomings present in the
technological infrastructures and in the technologies used.
Moreover, the following elements are stressed: the poor professional
preparation typical of the non-industrialized countries, which requires
monitoring even for the performance of less complex activities; and a
smaller or nearly non-existent demand market, also combined, in certain

sectors, with strong local competition from international competitors.
The need to have to monitor the activities entrusted to outside suppli-
ers—a need that grows stronger as the strategic criticality of the out-
sourced activity grows higher—can give rise to monitoring costs that, if
they reach levels excessively burdensome to the businesses’ economy, may
thwart the search for efficiency that guided the entrepreneurial choices.
On the other hand, the compromise costs—which may derive from
the lesser monitoring performed and from a possible, necessary adapta-
tion of the core activities to the lesser qualities of the third-party compa-
ny’s output—can only condition efficiency and corporate effectiveness
over the long term.
In this regard, empirical research has shed light on the difficulty of
controlling Chinese producers / executives, who are simple government
employees, underpaid, and lacking incentives and motivation: in working
life, it is widespread practice among local operators to attempt to circum-
vent the directives that are imparted, and not to comply with the orders’
specifications if they require a greater expenditure of time and energy.
It also bears noting that every outsourcing choice is accompanied by a
reduced accumulation of knowledge capital, which can be more or less
significant depending on the capacity, inherent in the activity being out-
sourced, to develop new knowledge. The loss of knowledge and experi-
ence may also—through a reduction in the flows of internal
communication, especially if informal and uncoded—compromise the
company’s ability to develop the core competences.
It emerges from the above that, in making choices of outsourcing to
outside suppliers, it is necessary to go beyond the theory of transactional
costs, in order to more rationally assess the positive or negative repercus-
sions that may arise from a given choice.
New Forms of Outsourcing

To strengthen the relationships put in place by a system of outsourcing
to international third parties, through the maintenance by companies
of control over the outsourced activities, the company should focus
its attention at home on the activities of strategic relevance, such as
planning, design, marketing activities, and the trading of the finished

products.
The maintenance of strategic leadership by the outsourcing company
might happen to be supported only through the creation of joint ven-
tures or, more generally, of agreements with the figures to which the com-
pany has outsourced the activities, if these activities are to be considered
“critical” for pursuing the pre-established strategic objectives.
Many research efforts on this topic have highlighted the presence of
collaborations among companies that have put in place near-integrative
collaborative relationships, based essentially on relationships of trust, in
which outsourcing companies maintain a position of strategic and opera-
tive domination (Calza 2001).
In a more general vision, and in keeping with what was found in the
operative reality, numerous critical factors a company needs to consider
when deciding to outsource have been identified. What is important for
managers is to understand the risks, and to have contingencies in place to
mitigate the risks.
More specifically, in their “make-or-buy” choices, managers should
focus on two main dimensions (Table 4.1): (a) the potential strategic
risks of outsourcing, that significantly affect the achievement of the pre-
set strategic objectives; (b) the potential operating risks of outsourcing,
that negatively impact on the level of operating costs, reducing the poten-
tial benefits of outsourcing.
Both strategic and operational risks are important, and their evalua-
tion should be taken into account to decide if and how outsource com-
panies’ activities: high potential strategic risks are critical because they
can reduce the company’s capability to get the strategic aims in the long-
term, while potential operating risks affect the implementation of the
decisions, and can be directly attributed to the outsourced activity, and to
characteristics of the target market.
Four choices consistent with the criteria set out thus far may be identi-
fied (Fig. 4.1).
The first choice (International outsourcing) regards a situation in which
potential operating risks are limited or absent, and the same is true for
potential strategic risks: the outsourced activities should be managed with
spot contractual relationships. The company can exploit the advantages of
Table 4.1 Outsourcing risks

Potential strategic risks of Potential operating risks of
outsourcing outsourcing
– Inadequate protection of – Increased complexity of controlling
intellectual property offshored activities
– Loss of control over technology – Low labour productivity in the host
with the connected risk of country
counterfeit and/or creation of – Lack of qualified personnel in the
competitors host country
– Loss of image of the country of – Lack of infrastructure
origin – Managerial costs, due to cultural
– Limited implementation of differences and language
strategies based on product/process – Increased delivery time
innovation – Costs due to physical distance
– risk of underuse of the know-how between consumers and suppliers
developed in the home country – Increased production costs in the
– Loss of image of corporate social host country (logistics, labour,
responsibility taxation)
– Host country’s hostility – Poor quality of offshored
production/customer service
– Issues related to customs
Source: Our elaboration
Potential strategic risks of outsourcing
High Insourcing in house Captive offshoring
(In own facilities) Wholly owned subsidiary
Joint venture/long-term International Outsourcing

Limited contracts
or Third parties
Absent External suppliers (External suppliers)
High Limited or absent

Potential operating risks of outsourcing
Fig. 4.1 Outsourcing risks and offshoring choice. Source: Our elaboration
economizing, and the low risks do not require stable relationships, which
could limit the exploitation of new opportunities on the host market.
The opposite choice (Insourcing in house) pertains to the case of high
potential operating risks and high potential strategic risks. In this case,
the loss of control could have negative effects for the company, which
risks creating new competitors and or losing the benefits of innovative
activities, especially if the know-how is developed essentially in the home
country. At the same time, the high level of potential operational risks
reduces the economic benefits normally connected to outsourcing, and
together with the former risks, this factor lays the groundwork for an
internalization of the activity, which should stay in the home market.
The other two choices describe particular situations in which the com-
pany must decide if the activity can be offshored or outsourced based on
the two major types of risk that companies face: operating risk and strate-
gic risk. In one case (Captive offshoring—wholly owned subsidiary), the
choice of outsourcing is based on financial considerations connected to
the limited or absent potential operating risks concerning the offshoring
in the host country. However, the high potential strategic risks imply the
need to maintain control over the offshored activity, and the creation of a
wholly owned subsidiary could guarantee the dual goals of being rid of
financial inflexibility without losing strategic control over critical resources.
An outsourcing choice of this kind often gives rise to cases of “guided”
international spin-offs (Calza 1996), which refer to that particular “cen-
trifugal” process that results, especially in the area of corporate restructur-
ing, in the separation of activities in the value chain that are less distant
from the core business, with the consequent creation of autonomous eco-
nomic and productive units in foreign markets rich in factorial endow-
ments, but with which one in actual operation remains so as to exercise
strategic control.3 Technological progress represents the real impetus for
this new type of outsourcing that finds its level of innovativeness in gen-
3
Example of international spin-off concerning DMC (Italy). DMC was born via a spin-off from
FAG Italia, a licencee of the German multinational group FAG Kugelfischer, which operates in the
rolling bearing sector. FAG has outsourced the distribution activity to former employees and
selected dealers, for whom it establishes an annual sales budget. The parent company has thus
reduced the production structure and distribution system, reducing its direct commitment to com-
mercialization (Calvelli 1998).
erating a self-driving process of developing entrepreneurship, thus giving

rise to new companies being spun off from those already in existence. In
the corporate perspective, the delegation of authority, which is to say the
granting of autonomy to the company’s peripheral organizations, and the
outsourcing of activities or functions to outside, spun-off units, become
the only possibility for the company’s survival and its technological devel-
opment. On the other hand, the process of offshoring by spin-off also
owes its strength to the search for autonomy by those employees who
have acquired greater professionalism and experience (executives and offi-
cers), and who therefore intend to start an activity of their own on the
basis of the acquired knowledge. There is also less business risk, since this
type of spin-off—which, for the particular relational rapport that is estab-
lished between the initial company and the spun-off one, may be defined
as “guided”—can count on the parent company’s financial and technical
support,4 and on its baggage of knowledge.
The last quadrant (Joint venture/long-term contracts—External suppliers)
refers to the case of high potential operating risks and limited or absent
potential strategic risks. The outsourcing of the business does not entail
risks connected to loss of control, but the market’s characteristics suggest
the need to avoid an increase in operational risks. To limit the risks of an
excessive fluctuation of market prices, the company should establish
near-market relationships, that is, agreements involving specific clauses
(allowances) to defend against price oscillations, multi-year contractual
relationships, or joint ventures.
Reshoring and Back-Reshoring

As already pointed out, outsourcing activities (core and non-core activi-
ties) to international third parties is a way to implement international
development strategies and, more particularly, to implement internation-
alization strategies for expansion when outsourcing is done in markets
4
These cases of spin-offs are also called “win–win spin offs” (Bussolo et al. 1993), which is to say
spin-offs that yield benefits for both sides. For the authors, this type of new entrepreneurialism
should be more widespread since, according to the results of the interviews held with companies
with more than 10,000 employees, the number of potential entrepreneurs would be about 5–10%
of employees; the percentage is greater in smaller-sized companies.
culturally close to the domestic ones, and for diversification when out-
sourcing is carried out on markets distant from the domestic ones.
Recent years have seen a “reconsideration” of the outsourcing decisions
that have been made: many companies in the industrialized countries
that had outsourced productive activities related to goods and services to
emerging countries (above all China and the area of the countries of cen-
tral and eastern Europe) are abandoning these markets, as they have
become less attractive due to economizing, hostile actions carried out by
host countries, and incentives to return to the home territory imple-
mented by the governments of the countries of origin.
We are now seeing cases of reshoring—the abandonment of host coun-
tries in search of more attractive markets—and above all of back-
reshoring, which describes decisions to bring back to the country of
origin all or part of the production activity that had earlier been entrusted
to foreign suppliers. Therefore, reshoring and back-reshoring may be
considered ways to implement internationalization strategies for re-
centring, as they were defined in the dispensation on the strategies of inter-
national development.
Most of the abandonments, 168 cases out of 190 considered, show a
return to the country of origin; 148 cases refer to the outsourcing of
production.
The countries being abandoned (Fig. 4.2) regard the Asian area and in
particular China (28%) which, on the other hand, had been the target
country of prior outsourcing. The phenomenon is quite substantial for
Europe companies that have outsourced to the area of the countries of
Central and Eastern Europe (14%). The reasons underlying the return
are connected with operating costs (poor quality of off-shored produc-
tion/customer service, increased production costs in the host country),
with the need to remove strategic risks (loss of image of country of origin,
the possibility of making better use of know-how developed in the home
country, inadequate protection intellectual property), and with a public
policy incentivizing the settlement of companies in domestic territory.
As concerns the countries of origin of the companies leaving the coun-
tries where they had outsourced, out of 190 cases examined, 22 compa-
nies reshored and 168 returned to the home country. Companies from
the United Kingdom (18%), Italy (17%), and France (12%) have reshored
and back-reshored, as against 4% from the United States (Fig. 4.3).
China (28%)
East Central Eu (14%)
Northern Europe (9%)
Italy-France-Spain (7%)
United Kingdom (6%)
Germany (6%)
India (5%)
Usa (3%)
Switzerland (3%)
Turkey (2%)
Belgium (1%)
Austria (1%)
Taiwan(1%)
Fig. 4.2 Share of European companies that have carried out reshoring and back-
reshoring: countries being abandoned. Source: Our processing from European
Reshoring Monitor—April 2018
United Kingdom (18%)

Italy (17%)
France (12%)
Norway (8%)
Spain (6%)
Germany (6%)
Sweden (6%)
USA (4%)
Denmark (4%)
Finland (4%)
Netherlands (2%)
Portugal (1%)
Belgium (1%)
Austria (1%)
Ireland (1%)
Fig. 4.3 Reshoring and Back-reshoring of Italian companies: Countries that leave.
Source: Our processing from European Reshoring Monitor—April 2018
As regards Italy, 12 companies out of 31 are reshoring from China,

while 5 abandonments originated in Central and Eastern Europe. Italian
companies in the mature technology sectors had outsourced production
to emerging countries in order to exploit the advantages of low labour
costs, but now many entrepreneurs, despite the tax-related, bureaucratic,
and systemic hurdles making return difficult, are implementing back-
reshoring, due to increased logistic costs, increased production costs in
the host country, untapped production capacity at home, implementa-
tion of strategies based on product/process innovation, and, not least, an
orientation towards relaunching “Italian-made quality.”
At times, it is the trade associations themselves, such as Assosport, for
example, that encourage associated companies to return to the domestic
market. Assosport’s moral suasion has in part contributed to bringing
back to Italy: Aku, a producer of trekking footwear, which left Romania
to return to Montebelluna; and Masters, one of the major worldwide
producers of ski, trekking, and Nordic walking poles, which left China to
return to Bassano del Grappa.
Reshoring and Back-reshoring Due to Strategic Risks: Some Cases

Diadora is an Italian company that produces footwear, T-shirts, and other
items such as backpacks and bags. Diadora has its headquarters in Caerano
di San Marco, Veneto (Italy), and plans to reshore 10% of its production
activities back to Italy. The objective is to produce 100,000 pairs of footwear
later this year and to cover 7–10% of the production across all of product
lines over the next three years. The rest of the production is still produced
in China, Thailand, and Vietnam. Currently, 5% of production is carried out
by in-house production and Italian suppliers. “Made in Italy,” the image of
the country of origin, offers Diadora a unique quantification and enables
Diadora to track its carbon footprint in order to control the environmental
impact of its production chain. The reasons for back-reshoring from China
are loss of image of the country of origin (“Made in” effect), limited imple-
mentation of strategies based on product/process innovation, and loss of
image of corporate social responsibility.
BerryAlloc is an international flooring solutions company headquartered
in Lyngdal (Norway), with 470 employees. BerryAlloc is part of the Beaulieu
International Group, a renowned international group with headquarters in
Belgium. BerryAlloc is the new brand in floor and wall covering that replaces
the former Berry Floor, Berry Wood, and the Alloc brands. BerryAlloc com-
pletely stopped purchasing aluminium products from Chinese suppliers;
instead the company began buying aluminium products from Norwegian

supplier Sapa, which uses new technology. New machines developed and
built by supplier Tronrud in Hønefoss were installed at both BerryAlloc and
Sapa for the manufacture of a new laminate flooring system. The reasons
for back-reshoring were automation of the production process and imple-
mentation of strategies based on product/process innovation.
Bomboogie has also abandoned Bangladesh to implement the know-
how developed in the home country. Bomboogie is the main clothing brand
of the Space 2000 apparel group founded in Italy by Giancarlo Musso in
1985. Today, Bomboogie’s production includes total look for men, women’s
wear, and an outerwear collection for kids. The group decided to make two
kinds of products (T-shirts and pants) in Italy under the Bomboogie brand,
as it is no longer appropriate to produce them in Bangladesh. The main
reasons for this movement include know-how in the home country (Italy),
and the “made-in” effect. Musso says, “We are able to offer customers a
high quality product at a fair price, and this was our strength even in the
most difficult times.”
Italian know-how was in fact the reason that led the Azimut Benetti
Group to leave Turkey and return to Italy. Italian yacht manufacturing com-
pany, Azimut Benetti was founded by Paolo Vitelli and is the world’s largest
private group in the nautical sector. In 2012, Azimut Benetti Group
announced it would “firmly defend its Italian roots” by moving production
activities for three entry-level yachts sold under the Azimut Yachts trade-
mark from Turkey back to Italy. According to the company’s statement, the
reasons behind this movement are Italy’s “made-in” effect, and the group’s
strategy of reinforcing its roots in Italy.
Natuzzi is an Italian company that produces high-end furniture and sofas.
In past years, the company offshored most of its production in order to
maintain its position in the market. Currently, the company produces in
Italy, China, Romania, and Brazil. The company is planning a backshoring
programme expected to begin in 2017. The plan involves keeping the man-
ufacturing of private labels abroad and focusing on the production of its
own brand in Italy. The backshoring plan aims to backshore 50% of produc-
tion currently in China and Romania. Production in Brazil should not change
due to local market conditions that permit selling the full production. The
main reasons for reshoring from China and Romania are loss of image of
the country of origin (“made-in” effect), limited implementation of strate-
gies based on product/process innovation, and automation of the produc-
tion process in the home country.
In the field of information technology, the innovative improvement of
the services offered has led Noonic to back-reshore (partially) from India.
Noonic, a technology start-up focusing on digital services, was founded by
three Italian entrepreneurs: Nunzio Martinello, Nicola Possagnolo, and
Sebastiano Favaro. In September 2011, the founders moved Noonic from
Italy to India because they thought India was an immense market for their
business. However, as the complexity of the products offered by the com-
pany increased, Noonic’s graphics department and some of its programmers
were moved back to Padua (Italy) from Bangalore (India) in 2014. Most of
the business activities stayed behind in India, as Asia remains the strategic
market. The main reasons are implementation of strategies based on prod-
uct/process innovation and the “made-in” effect. The company was moved
back to the home country (Italy) also because of its rapid development in
Europe, which demands more complex, better designed products.
Reshoring and Back-reshoring Due to Operating Risks: Some Cases

Piquadro is an Italian leather goods company (with 542 employees) special-
izing in business and travel items including suitcases, backpacks, and related
accessories. The company, which was founded in 1987, is active in Italy and
internationally. In 1998, it offshored to China, through a joint venture.
Marco Palmieri, founder and CEO, claims that the total cost of manufactur-
ing in China is rising, and has stated there are risks involved in future invest-
ments in the country. In January 2017, Piquadro started reshoring part of its
production of three years ago, and aims to respond to customers’ demands
by providing products that are genuinely “Made in Italy” as opposed to a
“Made in China.” The company’s costs have “skyrocketed in Asia, and the
logistics have always been a problem,” says Marco Palmieri, the brand’s
general manager. “And,” he added, “there’s also this: increasing the num-
ber of purses we make in Italy is the best way to discover ourselves and
where it all comes from: our creativity, originality, and our ability to work
in teams.” Beyond the need for greater organizational flexibility, the back-
reshoring from China was decided above all by an increase in total sourcing
costs and in particularly labour and logistics costs, by poor-quality offshored
production, and by increased delivery times.
Sleipner Motor is a Norwegian company based in Fredrikstad (Norway)
(number of employees: 140). The company has manufactured high-quality
parts for the marine industry since 1908. Specifically, it produces thrusters,
hydraulic steering, and stabilizers, as well as other products. Sleipner Motor
is a world leader in thrusters for yachts of under 160 feet, with its Side-
Power thrusters. According to Arne Skauen, a Sleipner Motor executive in
Fredrikstad (Norway), the products made in the offshore country (China)
were characterized by low quality and unsatisfactory delivery times. As a
result, Sleipner Motor moved its total production from China back to
Norway.
The change in the operating costs of sourcing was the main reason for
the decision to back-reshore FIVE (Fabbrica Italiana Veicoli Elettrici).
Founded in 2012, this Italian innovative start-up is a leader in the produc-
tion of electric bikes and motorbikes, and belongs to the Italian group
Termal. The company decided to move its manufacturing activities from
Shanghai (China) back to Bologna (Italy). The main motivation for this
reshoring decision is quality: FIVE was never able to achieve the quality
levels needed for the Italian and European consumers with the plant in
China. Other reasons included the increased production costs in China, the
long transportation time, and the “made-in” effect. Recently, FIVE has
announced Lockbike, an innovative way to protect both electric and tradi-
tional bikes from theft.
Changes in operating costs (labour, logistics) and increased delivery time
also led Berria Bikes to partially leave China. Berria Bikes, a new Spanish
company founded in 2012, is a family business started by the ex-profes-
sional David Vitoria and his brother Josè. In 2015, their revenues reached €4
million. The company’s new plan is to open a plant with 20 employees in
Ossa de Montiel (Albacete), backshoring the production from China and
Taiwán. Berria Bike aims to increase the customization of the products, and
to be able to make delivery only 21 days after the order. In addition, pro-
duction costs in Asia are increasing, motivating other competitors to back-
shore their production.
Phineas Group Ltd. is a small British company (14 employees) which spe-
cializes in the design and manufacture of plastic display products for shoe
retailers. According to Dan Wright, managing director: “We originally set
up operations in China 16 years ago to satisfy a large number of orders
from the Far East. However, in recent years we noticed a trend among mid-
market retailers to turn towards European manufacturers, due to quality
and lead times. We decided it would be ideal if we could manufacture more
of our products in the UK, in order to satisfy this demand…. By automating
our production we have been able to backshore the manufacturing of six
products that were previously made in China to our new factory in Bristol.”
The strategic project helped to identify skill deficiencies within the com-
pany, and encouraged the creation of a number of positions including mar-
keting manager, business development manager, process engineer, tooling
engineer, and compliance manager among others.
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5
Key Risks of Internationalization
he Risks of Internationalization:
T
An Introduction
The planning of an internationalization strategy is based on an analysis
process that aims to identify the target markets, assess the opportunities
and threats characterizing them, and determine the most suitable mode
of entry. This complex process has to combine the resources and compe-
tences the company has with the opportunities and threats characterizing
the target markets. This is not a linear and standardized process: psycho-
logical distance, the gap in development levels between the home and
host market, language barriers, and the social/institutional context of the
destination country are all factors that strongly impact the analysis’s dif-
ficulty and intensity. However, it is a fundamental moment in strategic
planning, also in the case where the choice to internationalize derives
from the emergence of spot opportunities for the company. When players
don’t acquire adequate knowledge of the target market, they risk failing
to grasp the threats existing in them, or the barriers that can limit these
markets’ attractiveness.

https://doi.org/10.1007/978-3-319-91551-7_5
Identifying target countries cannot occur separately from analysis of the

risks and opportunities present in the potential markets; it is a phase of
analysis focused on the outside environment and aimed at verifying the
presence of barriers or risks that might reduce the opportunities potentially
present abroad. From this perspective, it is necessary for the company to
carefully assess the specific potentials and risks of the individual markets and
the degree of attractiveness of their businesses. Although this assessment
cannot be done without analysis of the macroeconomic picture—which
allows the company to estimate the impact that the macro-environment’s
individual forces may have on its activity and profitability—it must also
consider soft factors connected with the presence of different beliefs and
values that can condition consumers, the work ethic, and the propensity for
collaboration with outside players. From economic indicators (e.g. GDP,
per capita GDP, unemployment rate, and inflation), the company obtains
information on the economic phase in progress in the country, the consum-
ers’ buying power, the presence of low-cost labour, the state’s role, and the
presence of laws hindering or facilitating investment. And from social and
demographic data, it gains a picture of the potential profiles of consumers/
workers present in the country. This analysis, although summary in nature,
may be useful for understanding the stratification of the population, the
presence of certain segments of interest for the company (just consider
products requiring particular levels of literacy, or that target particular age
groups), the level of qualification of labour, and the system of motivations
the company can exploit to create a spirit of belonging to the organization
and envisage career paths that make the most of human resources.
The company must be able to quantify the chief risks characterizing
these elements. To view the phenomenon schematically, it may be stated
that the first moment of analysis considers the available country risk data.
This may have major repercussions on the profitability of the investment,
on the capacity of local debtors to honour their debts and on the com-
pany’s ability to recoup investment over time, as well as on investment
risk, connected not only to the market’s economic potential but also to
the presence of cultural factors that can negatively influence the compa-
ny’s performance. The company must deepen the level of risk analysis,
identifying the impact that financial variables, in addition to political and
social ones, can have on their specific business.
Key Risks of Internationalization 131
The intensity of country risk, as a broader case of counterpart risk, is

obviously amplified in those countries that lack regulatory and finan-
cial institutions capable of protecting foreign creditors. Consider, for
example, the possibility of a country being exempted from the obliga-
tion to comply with contractual clauses, or the hypothesis in which a
contract contains clauses in breach of current law that are therefore null
and void for local law. Situations of this kind create daily problems for
businesses, especially small ones, that export to international markets,
and can only be reduced a priori, through adequate analysis of the regu-
latory system and, hence, through identification of clauses referring to
the rules in force or establishing the use of international arbitration
(obviously in the signatory countries of the conventions on the sub-
ject). Country risk assessment comes on top of the assessment of finan-
cial risks associated with internationalization. These risks, in the
simplest assessments, are related to exchange rate trends and to the pos-
sibility that the presence of administered economies or the impossibil-
ity of using some payment instruments will increase exposure to price
risks. The size of these risks depends on certain factors connected with
the sector the company belongs to and to the sources of competitive
advantage, but is generally higher today than in the past due to the
growing degree of financialization of the economy, and consequently of
companies.
In any event, the risk assessment is not generally aimed at the exclusion
of a given market a priori. In fact, to reduce entropy risk, companies do
not tend to exclude certain markets to the benefit of others, but to seek—
in order to minimize the risks—the ways most suited to the specific char-
acteristics of the individual markets.
The Financialization of Companies

At the macroeconomic level of the development of the financial activities
of international companies, there are multiple determinants of the new
role taken on by finance in decision-making choices, and of the birth of
new financial instruments in support of both strategic and operative
choices.
The evolution and pervasiveness of the new technologies of informa-

tion science have expanded the boundaries of competition between com-
panies and among sectors; changes in the competition landscape have
required a different response from companies and, from this perspective,
have helped develop a new role of corporate finance, seen as a source of
competitive advantage for international companies.
Operators in the different capitalist settings now find themselves deal-
ing in different markets and in different securities and currencies, operat-
ing in one market in order to invest in another—and developing policies
of arbitrage and speculation in stock, bond, and currency prices. In addi-
tion, the changed competitive landscape and globalized financial markets
have led companies to centralize the operative management of flows in
foreign currency, and therefore exchange risk, with the possibility of the
hedging and matching of differently oriented positions, and of using
such instruments as swaps and options.
Large-sized and corporate enterprises have developed greater knowl-
edge in financial matters and are currently particularly attentive to con-
verting securities in foreign currency, to the differences between domestic
and foreign tax systems, and to the interrelationships between transfer
prices and taxes, and among transfer price policies, financial profits, and
competitive advantages.
It is by no means easy to identify the direction and intensity of the
relationship between level of integration of the markets (and especially
financial markets), and technological development. It bears observing,
however, that since the first introduction of the Reuters display in 1973,
there has been a considerable increase in the development of the market
integration process that began with the crisis of the Bretton Woods sys-
tem of fixed exchange rates.
In connection with technological evolution, it bears pointing out that
the globalization of markets (of goods, factors, and capital), understood
as the strong interaction of markets, in requiring a faster process of com-
panies’ adaptation to an articulated and complex environmental setting,
has also created new opportunities to be grasped. It has at the same time
raised the need for more, and more flexible, financial resources.
In recent decades, every country essentially had a single financial market,
in which the different types of instruments circulating in it were exchanged.
In this atomistic and highly public law–oriented conception, the operators
on the financial market were seen as public institutions at the service of

private individuals, and not as companies producing services and them-
selves the object of entrepreneurial initiatives. Therefore, the interaction of
financial markets has overturned the atomistic conception, bringing about,
on the macroeconomic level, a systemic market vision. Although internally
articulated with regard to the operators’ behaviours and regulations, this
vision should be considered from a unitary perspective with regard to inter-
connection among the decisions undertaken locally, and in terms of the
supranationality nationality of the effects derived from these decisions.
Moreover, considered as a search for the ubiquity of competitive
advantage, globalization has resulted in focusing managerial attention on
new decision-making problems regarding the location of the business
activity, the creation of often captive financial companies, and the acqui-
sition of currency and tax benefits depending on the regulatory differ-
ences that exist in the different countries in the matter of inter-company
relations and transfer of income.
The fall of the exchange monopoly and of the bank “channelling” of
foreign transactions contributed to developing a systemic logic in interpret-
ing financial movements on financial markets. In the common financial
space, the competitiveness of financial markets introduced by international
unification entails an allocation of capital done with a view to comparative
advantages, and thus to arbitrage among the various opportunities that are
manifested in the individual markets; competitiveness means that financial
exchanges may concentrate in the markets that are most efficient in terms of
costs and risks related to the different transnational activities undertaken.
he Role of the Function of Finance

T
in Internationalized Companies
In this perspective, finance has broadened its field of action, involving a
number of different areas/themes within it, such as
–– the planning of medium- and long-term financial flows regarding the

policies of international investment and the related policies of choos-
ing the sources and types of financing;
–– the choice of criteria for assessing the current and prospective conduct
of the activities of international concerns;
–– multi-currency treasury management, which is to say the management
of cash surplus/deficit generated by financial movements in currencies
other than the national one;
–– the decision-making choices and the hedging techniques to be adopted
to face the risks derived from uncertainty over future variations in
financial variables;
–– actions aimed at taking advantage of the opportunities derived from
the existence of anomalies in financial markets; and
–– actions aimed at taking advantage of the opportunities derived from
the presence of different tax burdens in the various countries, through
suitable policies of transfer prices for goods and services between the
parent company and associated companies.
The greater financialization of business activities results in an increase—

in both intensity and volume—in the economic and financial risks com-
panies are exposed to. Albeit aware that not all risks can be totally
eliminated, it is necessary for companies to learn the effects resulting
from exposures to different types of risk.
In the first place, international companies must increasingly acquire a
capacity to control market risks, which is to say those risks to which eco-
nomic operators are exposed as a function of unfavourable variations of
the prices of the underlying activities. Market risk, then, is the risk an
internationalized company’s economic and financial situation is exposed
to depending on unfavourable variations in the market prices of financial
activities: exchange rates, commodities and securities prices; interest
rates.
Secondly, companies that operate above all in emerging countries must
acquire an ability to “control” the credit risks linked to the possibility that
the other party in a financial operation might not meet the obligation taken
on by the deadlines and under the conditions provided for by the contract.
It bears noting here that in cases where there is a high possibility that
a defaulting party’s crisis situation will spread by “domino effect” to other
operators, the company’s risk exposure increases: the other party’s credit
risk enlarges to become systemic risk, which includes the case of country
risk.
Given the growing importance of business finance activities and the

repercussions erroneous conjectures may have on the trend in financial
variables, the problem is raised of identifying companies’ behaviour with
regard to the variability of these magnitudes. These magnitudes’ impacts
on economic and financial equilibria may be verified after the fact, and
the likely repercussions estimated beforehand.
In response to expected fluctuations in financial variables, management
must seek to act in a timely fashion, concerning itself with limiting or, if
possible, nullifying the potential negative economic repercussions con-
nected with their unfavourable trends. Contrariwise, it must also seek to
seize the opportunities arising from certain expectations since, with the aid
of suitable financial instruments—such as financial arbitrage, repo opera-
tions, and more innovative instruments like derivatives—the irregularities
present in financial market trends may also present an additional source of
increased corporate income. The dichotomy of the results leads, then, to
defining exposure to market risk, unlike credit risk, as a “two-way-risk.”
Among financial variables, particular attention must be given to the
foreign inflationary component (exchange rates); exchange fluctuation
generates a dense network of interrelationships with retroactive effects
leading to variations in the prices of the factors and goods, modified mar-
ket demand, changes in the levels and structure of interest rates, and
imbalances in the companies’ economic and financial circuits.
As regards interest rates, uncertainties over their medium/long-term
variations have led credit institutions to adopt particular actions to hedge
against financial risk, such as cutting down the duration of loans, replac-
ing the fixed-rate system with indexed rates, and reviewing loan condi-
tions more quickly. Moreover, the shorter duration and indexing are also
the levers used by the issuers of fixed-rate securities, for the purpose of
conquering increasingly large segments of the market of savers.
Fluctuations in the financial variables have an impact on corporate
performance that is not homogeneous for all companies in any sector, but
varies depending on
–– the relevant sector, its structure, and therefore the intensity of compe-
tition; and
–– the regulations, in the markets of origin, of the productive inputs and
of the destination of market outputs.
The mode of implementation of companies’ internationalization strat-

egies can also influence the connections between financial markets and
corporate performance, if one considers, for example, that the passage
between forms of competition and of collaboration may also bring about
supplier/customer agreements aimed at a more equitable division of mar-
ket risks.
Therefore, it is unthinkable that the management of international
companies might let costs and revenues expressed in a foreign currency
(with the single currency in Europe, foreign currency refers to non-EU
countries) fluctuate freely, and not decide, in response to unfavourable
fluctuations, what market risk management policy to implement; this
becomes even more important for multinationals, whose branches, often
operating in weak-currency markets, may record losses or worsened com-
petitive positions that cannot be linked directly to the parent company’s
governance policies, or to the branches’ decisions concerning the activi-
ties included in their sphere of responsibility.
In the case of prices for raw materials, management has developed
increasing awareness of the vital role played by the function of procure-
ment; this is in light of the imbalances created following the gradual
decentralization of production, and the increased internal variability of
the supply markets. In response to price increases, or to expected increases,
management streamlines stocks of materials on the one hand, while on
the other hand seeking to establish relationships, or types of strategic alli-
ances, with suppliers; the aim is to guarantee the quality of the purchases,
to contain price variations within given time frames, and to meet delivery
deadlines.
The moment of purchase is a moment of indirect assessment of the
company’s effectiveness of operation, understood by the customer as the
organization’s ability to achieve a better trade-off between price and prod-
uct quality attributes of importance to consumers in accordance with
their scale of relative importance; on the other hand, the choices made by
consumers in a given segment provide clear proof of the effectiveness of
the marketing programmes developed by management in for that par-
ticular target market. From the standpoint of marketing actions, price,
also considered in its relationship with the quality that may be perceived
by the consumer, becomes, for the planner, only one of the decision-
making variables to be used to modify given market situations to one’s

own advantage; this means that for a given asset there is what Panati
(1987) called the “firmament of prices,” a “phantasmagoric kaleidoscope”
that disposes the consumer to paying more for a product, not different
from others present on the market, but differentiated from them in terms
of brand or the image that the producing/retailing company has been
able to create over time.
“Purchase marketing” activities make it possible to achieve, at the same
time, the objectives of lower levels of safety stock, reduced inventory
stocking times (obtained by bringing arrival dates closer to the dates of
use at the factory), and, in the final analysis, lower pressure on corporate
cash flows.
In this regard, the managerial problem that the corporation is called
upon to face takes concrete shape in the choice of hedging policy to be
implemented or, lacking a hedge, in the orientations to be given to the
branches, ensuring the achievement of the strategic objectives pursued
both centrally and peripherally.
To respond efficiently and effectively to financial market turbulence,
management must, in the first place, learn how to find out the relation-
ships between financial variables and corporate performance. It must
then learn how to “make conjectures” on the future trend in these vari-
ables, in order not to find itself unprepared to deal with events or, con-
versely, for to try and exploit opportunities as they arise.
It is in this phase of the company’s relationship with its environment
that the interrelationships between efficiency and effectiveness in entre-
preneurial action are closer and more evident.
Creation of Supervision Nodes

As stated, coordination difficulties increase considerably in situations of
mutual interdependence, that is, where internationalized companies
operate with a view to the systemic interconnection of the effects found
in the various environments in which the associated companies are
located.
Where there is a complex system of relationships, it may be useful, for

more efficient and effective control and governance of the corporation’s
financial activities, to cut the network of connections between the parent
company and decentralized units, and to create “supervision nodes” to be
tasked, under the control of the parent company or peripheral unit, with
coordinating the associates’ activities that fall under their respective
spheres of action.
Through the creation of “financial nodes” often located in a market
that is particularly attractive in terms of less restrictive policies on con-
trolling the activities of the companies operating in it, geographically
disperse multinationals can obtain financial profits by centralizing the
management of the associates’ financial activities.
One example of a supervision node is that of the reinvoicing centres
whose purpose is to centralize, within themselves, procurement for
groups of associates, with the consequent economies of cost derived from
the increased bargaining power that a centre can obviously have.
It will then be the centre that invoices the associates, depending on the
flows of goods sent to them. Generally, invoices are made by the centre in
the associates’ currency and, in that way, the centre, by centralizing
exchange risks within itself, can manage the entire group’s multi-currency
treasury. By this technique, a more orderly group currency policy is
pursued.
Reinvoicing operations have the benefit of avoiding some local resis-
tance to the parent company’s strategic choices and offer the possibility of
extending compensation mechanisms to operations concluded autono-
mously by the individual associates with outside customers.
The reinvoicing centre can also pursue transfer price policies, with the
term “transfer price” to be understood as the price paid by an associate to
the parent company, or to another associate or the reinvoicing centre, for
the transfer of raw materials, components, intermediate products, or
services.
From the technical standpoint, transfer prices are one of the most
complex problems to be solved in the management of multinationals,
since if the cost of the transferred products/services could be determined
with certainty, in all its components, problems of estimating the transfer
prices would not arise. On the other hand, some costs are, by their very
nature, difficult to divide among the associates (e.g. consider research

costs).
The transfer prices to be attributed to the flows of goods transferred
from a reinvoicing centre are set basically as a function of the purposes
pursued by the centre or the corporation.
Prices may be lower than those charged on the associate’s market, when
the local competitive situation is rather intense, or when the associate is
in a start-up phase and must seek to achieve possible competitive posi-
tions as quickly as possible. In this case, the reference price’s parameter of
reference can be the cost incurred by the centre, which discounts econo-
mies of scale, or even a lower price of the procurement cost borne by the
centre.
If the centre is unable to bridge the cost/price gap by means of higher
transfer prices attributed to other associates, it will suffer fictitious losses,
ascribable exclusively to the pursued price policy. The associate so
favoured will earn fictitious profits not attributable to the operational
conduct of local managers, while the associates in a situation of higher
transfer prices of course earn less profit.
Profits are thus transmitted from (favoured) associate to associate, and
this is why transfer price policies implemented by corporations often
cause intra-organizational conflicts, especially if the peripheral managers
are judged (and paid) on the basis of locally earned profits.
In situations where the corporation’s policy is centred on a more neu-
tral assessment of the associates’ performance, from an equidistant per-
spective, the criterion followed by the centre may be that of assessing the
transferred goods on the basis of the corresponding prices charged on the
individual local markets. The formation of fictitious losses or profits can
thus be avoided, and it will be the centre that obtains a profit (or, unreal-
istically, a loss) as a sum of each associate’s cost/price gaps.
The transfer price policy also pursue other goals, such as:
–– Earning, through higher transfer prices of the goods, low profits where
the tax system is more rigorous; conversely, the centre will seek to earn
higher profit where the tax system is less rigorous, in this case by trans-
ferring lower prices—lower than the transferred goods’ cost on the
local market;
–– Attenuating the effects of restrictions on movements of capital, divi-

dends, and royalties; reducing the effects of nationalization, should
this take place;
–– Greater influence not only on taxation but also on duties and, there-
fore, on the price of raw materials or semi-finished products, when
duties are applied to imports on the basis of the value of the products
transferred from one country to another.
It is lastly to be pointed out that it is becoming increasingly hard for

multinationals to practise transfer price policies, since (Pellicelli 1990)
–– the differences among tax systems are continuing to diminish, espe-

cially in industrialized countries, and there are therefore fewer incen-
tives to transfer profits from one country to another;
–– tax administrations are increasingly attentive and attuned to these pro-
cedures that may reduce their tax revenues;
–– the assessments of the associates’ results may be distorted if the transfer
price policy has objectives different from that of calculating actual cost
(assessment of the branches’ activity).
Financial Risks and Counterparty Risks

The greater financialization of business activities increases, in intensity
and volume, the economic and financial risks to which companies are
exposed. While aware that not all risks can be totally eliminated, compa-
nies have to learn to recognize the effects derived from exposure to differ-
ent types of risk.
In the first place, international companies must increasingly acquire an
ability to control market risks, which is to say those risks to which eco-
nomic operators are exposed as a function of unfavourable variations of
the prices of the underlying activities. Market risk, therefore, is the risk to
which an internationalized company’s economic and financial situation is
exposed as a function of unfavourable variations of the market prices for
financial activities that, excluding the financial variations linked strictly
to speculative movements (values of the stock market indices), are
exchange rates, commodity and security prices, and interest rates. The
risks connected to the trend in financial variables are two-way risks:
proper financial management must take account of the need to be pro-
tected from unfavourable variations, but must also consider the opportu-
nity cost of any hedging; and therefore the possibility that these hedging
operations might preclude the ability to exploit any positive variations in
these variables. From this perspective, it may be said that financial risks
(different cases in which market risk is articulated) cannot be limited:
hedging policies allow companies to transform the uncertainty connected
to the variation of financial variables into a calculated risk, and thus to
limit exposure to the negative effects that may derive from them.
In the second place, companies that operate above all in “difficult”
markets must acquire an ability to “control” credit risks, connected with
the possibility that the counterparty in a financial operation might fail to
meet its obligation by the deadlines and under the conditions provided
for by the contract. In this regard, it bears noting that in cases in which
there is a high possibility for a defaulting party’s crisis situation to spread
by “domino effect” to other operators, the company’s risk exposure
increases: counterparty credit risk expands to become systemic risk. One
last case of counterparty risk is country risk, understood as the possibility
that a debtor defaults due to causes beyond the individual’s control,
involving a country’s institutional sphere.
Looking specifically at managing financial risks, financial immuniza-
tion has the purpose of reducing the risks underlying the variability of
prices, exchanges, and interest rates. If hedging techniques are system-
atically adopted for all at-risk operations, the company eliminates, or at
least “controls,” a “calculated” risk, the riskiness of the negative reper-
cussions on management results caused by fluctuations in financial
variables. Over the long term, hedging lowers the likelihood of encoun-
tering financial crises, thereby reducing the variance of the company’s
value (Mayers and Smith 1982; Smith and Stulz 1985). The use of
hedging instruments has increased considerably in all financial mar-
kets, and the significant development recorded by derivatives is cause to
suppose that these instruments have replaced the more traditional
forms of hedging (defensive contractual terms, fixed-term contracts,
insurance coverage).
The problem is raised of the determinants that lead companies to cover

their financial risks, and that cannot be ascribed to a generic risk aversion
which theoretically explains the choices of individuals in a society more
than those of institutions and companies.
As Modigliani and Miller taught back in 1958, portfolio theory main-
tains that corporate hedging cannot benefit the shareholders, because it
does not lead to reducing the cost of capital; in fact, since shareholders
can diversify their portfolios, the reasons for a company to perform hedg-
ing actions in order to safeguard shareholders from financial risks no lon-
ger apply.
However, it bears noting that in a traditional perspective and on a
macro level, the possibility of reducing risks through portfolio diversifi-
cation was recognized only for investors that could operate in markets
offering a wide array of stocks to invest in. In fact, it was maintained that
when shareholders were operating in environments marked by diffuse
stockholding, typical of settings dominated by the separation between
ownership and control, they could effectively take advantage of diversifi-
cation opportunities. An efficient and multi-sector financial market
could offer a broad choice of stocks to hold, and thus a higher portfolio
flexibility depending on the opportunities as they arose on the financial
market.
It was also maintained that shareholders could not carry out an effi-
cient diversification of their portfolios when the market concentrated
capital in the hands of a majority interested in “controlling” business
activity. If on the one hand this kept outside third parties from entering
into the decision-making systems, on the other it also limited minority
investment choices. Moreover, majority shareholders, in order to make
smaller stockholding more stable and also to indirectly control the non-
speculative movements of shares on the stock market, had to pursue the
primary objective of making the return on the stock investment more
stable (at any rate, this is the objective that led to the creation and affir-
mation of savings shares); the case of hedging done by companies to pro-
tect shareholders from financial risks might then be considered from this
perspective. However, in the current environmental dynamic, techno-
logical development, market integration, and globalization have expanded
the boundaries for choices, and broadened opportunities for investment,
and investors belonging to markets marked by concentrated stockhold-

ing can thus also implement policies to diversify their own portfolios.
If the shareholders’ interest is not the main determinant leading the
company to hedge against financial risks, the incentivizing factors are
linked to the possibility that suitable hedging policies and the choice of
appropriate hedging instruments can shelter the company from liquidity
crisis, and from a strict dependency on contingent factors, thus helping it
act with a long-term outlook, with positive effects on maintaining or
growing its economic value. This is particularly important in the perspec-
tive of an environment subject to changes that not only cannot be con-
trolled, but often cannot be foreseen. On the other hand, the greater
environmental complexity has only increased the types of risks and their
intensity.
The multiple financial risks that companies operating internationally,
both outgoing and incoming, have to face may be summed up as follows
(Errunza and Losq 1987):
–– Currency risks, related to volatile exchange rates and to the loss of

consumers’ purchasing power
–– Political risks, including the risks of expropriation and nationalization,
which present an explicit barrier to capital flows
–– Investment risks, correlated with the stage of development achieved by
the host country
Currency Risks
Currency risk, which is to say the risk connected with the variability of
exchange rates, produces three important effects for companies:
1. In the first place, an exchange variation impacts the debts owed to

and by companies in foreign currency. This risk, defined as transac-
tion risk, is manifested whenever companies grant or receive defer-
ments of payment by or from counterparties situated in different
countries. Of course, the risk exists only if the transaction must be
settled in a currency other than the home currency, and yields its
effects when calculating the countervalues in national currency of

debts owed or to be collected in foreign currency. In a “direct or indi-
rect” regime, it takes concrete form as follows: for the importer, the
possibility that a reduction in the exchange might result in an increase
in the euro countervalue of debts owed in foreign currency; for the
exporter (seller), the possibility that an increase in the exchange might
result in a decrease in the euro countervalue of the debt owed to it in
foreign currency. To the contrary, in an “indirect or direct” regime,
the importer fears the increase in the exchange rate (a circumstance
that would increase the countervalue of the debt expressed in its own
reporting currency), and the exporter fears the decline in the exchange
rate (which would diminish the countervalue of the debt owed to it
in foreign currency).
2. The variation in the exchange rate also impacts the actual counter-
value of the financial statement items related to transactions in foreign
currency. In the time that passes between the entry and the closure of
the financial statements, the exchange might possibly undergo
variations such as to modify these entries’ relative weight. There is
debate in this regard as to the moment in time starting from which
exposure to risk begins; this moment would appear to coincide with
that in which the order is made (for the purchaser) and the invoice
issued (seller), again in currencies other than the home currency. This
form of currency risk is defined as translation risk.
3. Lastly, but of no less importance, the exchange variation may impact
the company’s competitive position in a given market, rendering the
investments it has already made less profitable, or its products less
attractive. This is more generally defined as economic risk.
The unifying aspect of the different types of exchange risk may be

identified by focusing attention on the fundamental effects connected
with exchange rate variation, and on the way in which these effects are
perceived as management goes forward (Stampacchia 1995). For the
author, there are essentially two elemental effects that exchange rate varia-
tions can have on the “system” of flows and values in the reporting cur-
rency of an international company: the countervalue effect, representing
the variation of the reporting currency’s value as a function of the varia-
tion of the exchange; and the currency flows effect, representing the varia-
tions of the flows as a function of the modifications of the overall system

of expediencies induced by exchange rate variations.
Emerging from these concepts, and especially from the currency flows
effect, is the bond of influence that exists between exchange rate fluctua-
tions and the competitive position of companies, when “unfavourable”
variations are consolidated over time. Therefore, for efficient governance
of transaction risks, it would be appropriate for the manager to seek, at
the very moment in which credit or debt positions in currency are taken
on, or at a later time (prior, at any rate to the positions’ maturity), to
effect the relative hedging, if not systematically, at least from a selective
perspective. There are many tools available to companies to hedge against
transaction risks, and they permit a broad range of alternatives, which
may be functional to the managers’ financial knowledge and to the nature
of the available information.
As for the instruments to hedge against currency risk, a distinction
between traditional and innovative is made. The traditional ones are
invoicing in reporting currency (generally invoicing is in the seller’s cur-
rency, but the choice at any rate depends on the parties’ contractual
power); insurance (highly expensive, and often impracticable for mini-
mum amounts and country); and the establishment of defensive clauses.
The most-used defensive clauses are the currency basket (more stable with
respect to the individual currency due precisely to the possibility that the
revaluations of certain currencies and devaulations of others might offset
one another), the establishment of an exchange cap to the exporter’s
advantage (“direct or indirect” regime), the establishment of an exchange
floor to the buyer’s advantage (“indirect or direct” regime), and the pos-
sibility of establishing an exemption, and thus the possibility of using the
established exchange up to a certain threshold.
Price Risks
In addition to the risks specifically connected to internationalization,
consideration should be made, in the area of financial risks, of the volatil-
ity of commodity prices, which directly or indirectly impacts companies’
production costs and therefore their profit margins. High volatility in the
prices of certain raw materials, often originating from countries with
weak currencies, makes price risk management critical, especially for

those companies with considerable risk exposure due to a greater inci-
dence—out of the total of productive inputs—of the factors imported
from abroad. The lesser the level of corporate added value, and the higher
the replacement costs, the greater the exposure is. The negative repercus-
sions for corporate profitability may be manifested in the form of
increased production costs, reduced operating margin, and a lower price
competitiveness in comparison with competitors.
With regard to price risks, three types may again be discerned:
1. Transaction risk, linked to the possibility that an increase (decrease) in

the commodities’ quotations might force the buyer (seller) to pay (col-
lect) an amount greater (less) than that estimated.
2. Replacement risk, linked to the possibility that an increase in prices
might shift demand towards replacement products.
3. Economic/competitive risk, related to the possibility that the increase
(decrease) in prices might be to the disadvantage of a company but
not its competitors that purchased (sold) at more affordable prices.
In this case as well, two categories of hedging instruments may be dis-

cerned: real instruments and financial instruments.
As concerns real instruments, mention is to be made of agreements at a
fixed price (depending at all times on the parties’ contractual strength) and
of the use of the technique of speculative inventory (purchasing when
prices are lower). This policy, although fruitful, cannot always be used by
companies. In the first place, the possibility of using it depends on there
being adequate liquidity; in the second place, not all raw materials and
semi-finished products can be stocked and, at any rate, stocking depends
on having adequate warehouses. Lastly, this policy exposes the company to
capital expenditures and the risk of obsolescent and decaying inventories.
Credit Risk, Country Risk, and System Risk

As already discussed, credit risk expresses the possibility that the counter-
party in a financial service might fail to meet its obligation by the dead-
lines and under the conditions established by contract.
The assessment of exposure to credit risk includes essentially subjective

components, as well as certain parameters of reference for the assess-
ments, such as the time left before the contract expires, and the expected
variability of prices, the exchange rate, or interest rates.
The difficulties inherent to measuring credit risk, which grows to the
extent in which there are no frequent relationships of exchange with the
counterparties, result in entrusting to specialized operators, such as rat-
ings firms, the judgement as to the counterparties’ reliability. Often, the
assessments expressed by these agencies merely replicate the ratings deter-
mined by competitors, thereby accentuating market turbulence; it fol-
lows that an error that is made when competitors are “in the right” may
create damage greater than the benefits derived from an accurate forecast,
in the case in which the competition is “in the wrong” (Masera 1993).
Some financial instruments, such as derivatives, for example, in pro-
viding a hedge against market risks, at the same time offer guarantees to
protect credit risk. In this way, two orders of benefits are produced: at the
microeconomic level, the intermediaries can, with lesser uncertainty,
adjust, to the “desired” levels, their exposures to the expected fluctuations
of financial variables; at the systemic level, financial transactions that are
made do not create new risks, but ensure these risks are distributed more
rationally among operators.
For credit risks too, coverage may be gained a priori, by transferring
the risk itself to third parties: SACE insures export credits (Ossola Law),
provided that the payment deferments granted by the exporter to its
debtor exceed a given time frame, equal to eighteen months.1 It is also
possible to protect oneself from credit risks with the known procedural
techniques established for documentary credits.
As concerns country risk, it bears noting that the repeated foreign debt
crises of the developing countries and the countries of Eastern Europe,
and financial integration and liberalization processes, have accentuated
the problems related to this risk.
Signs of increased country risk, such as longer delays in making pay-
ment, tend to yield economic effects upon the value of the exposures,
1
According to the opinion of some entrepreneurs, the bureaucratic problems connected with the
excessive required documentation often force the acceptance of solutions requiring deferment
times far longer than 18 months.
even before any concrete manifestation of insolvency, through the depre-

ciation of the credit portfolio recorded on the basis of market quotations
(Carcascio 1995).
In comparison with counterparty risk, country risk involves responsi-
bilities that fall within the sphere of government and, moreover, may be
realized regardless of the insolvency of the individual counterparty, when
the authority’s will to repay foreign debt, public or private, ceases. The
level of country risk reins in enthusiasm for the international diversifica-
tion of portfolios, at times also with contained levels of risk, in the con-
sideration that any losses associated with it (nationalizations, prohibition
against expatriating capital and profits) may be considerable in size
(Solnik and MacLeavey 1991).
Doubts as to a country’s political and institutional continuity and the
variability of regulations, widespread delays in payments, ethnic conflicts,
and internal conflicts are all parameters taken as a reference in evaluating
a country’s rating. They serve as sentinels of the economic effects that, in
terms of probability, will impact the value of the exposures with regard to
that country.
Generally, there is a depreciation of the credits owed by countries at
risk; the debt-equity-swap mechanism takes place in fact through a dras-
tic reduction of the nominal value of the debts owed to operators in
industrialized countries by operators in developing countries.
In recent years, to face country risk, innovative financial instruments
have come into being, such as credit derivatives, created in the early
1990s; their purpose is to transfer to a counterparty the credit risk con-
nected with a specific underlying activity (a bond, a bank loan, or a com-
bination of these activities).2
2
Instruments or techniques aimed at obtaining this result already existed, for example, in the form
of bond insurance, which did not gain much traction. Another, more widespread, form calls for the
creditor to take on short positions in futures, having as their object stocks in the debtor company.
This technique in particular allows a profit to be obtained in the case in which the company’s insol-
vency or default reduces the value of its shares, and this profit goes towards offsetting the losses
suffered by the creditor. The mechanism, however, has a high basic risk, as the reduction of the
shares’ value following the insolvency cannot be easily foreseen; moreover, futures contracts for
individual stocks are available only for listed companies, whose stock has a high float.
Credit derivatives consist of an agreement between two parties, through

which one party, upon payment of a single or periodic commission, is
hedged against the credit risk connected to the activity of reference; the
hedge consists of the counterparty’s commitment to perform a counter-
service, should a specific “credit event” occur, such as insolvency, bank-
ruptcy of the debtor of the underlying activity, or a worsening of its
creditworthiness.
The counter-service may consist of a cash payment of an amount pre-
determined in the agreement, a payment of an amount determined in
accordance with the procedural schemes established in the contract (dif-
ference between the initial value of the activity of reference and that
following the occurrence of the event, pre-established percentage of the
credit’s recovery value), and the physical delivery of the activity of refer-
ence, if this is available.
The most widespread form of credit derivative has been that of the
credit swap, in its two main forms: Default Risk Swap and Total Return
Swap, which have different structures for the payments established by the
agreement (Hart 1995).
Default Risk Swap entails, for the duration of the contract, the periodic
exchange between two counterparties of cash flows calculated on a notional
capital consisting of the value of the activity of reference: the contracting
party that transferred the credit risk (seller) pays to the counterparty, at
different agreed-upon dates, a cash flow obtained by applying to the
notional capital a rate that takes account of the credit risk connected with
the activity of reference (Libor + X basis points). The contracting party
that accepts the transfer of the risk (purchaser) pays the counterparty a
cash flow by applying to said notional capital a base rate equivalent to the
cost of the funds, increased by a spread (Libor + Y basis points).
This payment structure, then, generates a differential cash flow that in
fact constitutes the periodic premium borne by the party transferring the
credit risk; the level of the premium depends on the size of the risk related
to the activity of reference. In the event of the country’s insolvency, the
seller receives, from the counterparty, repayment of the debt owed to it.
There may also be the case in which the purchaser, generally a bank,
issues a bond with a yield equivalent to the country risk for the underly-
ing activity. This bond may be purchased by an institutional investor
(investment fund, insurance company) in turn interested in increasing

the country risk in order to raise the performance of its portfolio, which
takes on the burden, in the event of insolvency, of repaying the debt to
the seller.
The likelihood of loss by the party accepting the credit risk is a func-
tion of the likelihood of the debtor’s insolvency, of the leverage factor
predetermined by the agency, and of the realizable recovery rate. The
statistical data furnished by the leading rating agencies and regarding
the elements listed earlier may be used to assess the operation’s
riskiness.
The Total Return Swap is another possible credit swap structure. In it,
the parties, during the contract’s lifetime, exchange, in addition to the
periodic commission, any revaluations or devaluations of the underlying
activity. This means that the periodic cash flows generated by the agree-
ment are not always and exclusively borne by the party transferring the
credit risk: the direction and amount of the cash flows also depend on the
variations that the value of the activity of reference undergoes between
two payment deadlines.
It is clear, then, that one of the crucial elements in the agreement is
certainly the determination of the mechanism for assessing the activity
underlying the credit swap. If it is a bond that is traded on the market, its
market quote can then be used; otherwise, one of the theoretical models
developed for this purpose must be employed.
Given the relative complexity characterizing the two types of credit
swap illustrated earlier in the text, it is appropriate, upon concluding the
agreement, to pay particular attention to the definition of all the contrac-
tual elements and, in particular the key terms, such as those connected to
the credit event (insolvency, bankruptcy, etc.) and to the consequent
structure of the payments. The purpose of this is to avoid objections or
defaults based on unclear elements of the contract. The International
Swap Dealer Association (ISDA) is also moving in this direction, as it is
seeking to formulate a standardized clause able to univocally define the
contract terms.
Going on now to analysing the possible concrete uses of these instru-
ments, it must be stressed that their characteristics make them particu-
larly attractive for banking enterprises and, more generally, for financial
intermediaries, which, following their activities, have always been exposed

to credit risk.3
Thanks to the use of credit derivatives and of credit swaps in particular,
banks can treat credit risk separately from the granted loan, thus achiev-
ing greater flexibility in implementing their credit risk management
programmes.
Of the most recent players in the credit derivatives market, mention
must also be made of industrial and commercial enterprises, at least the
larger ones.
Hedging Policies and Derivative Instruments

Derivative instruments are contracts whose value depends on the trend in
the underlying activity. Here, attention will focus on three types of deriv-
ative instruments: futures, options, and swaps. The three instruments
may have financial activities, currency, or commodities as their underly-
ing activity, and can be used in accordance with more or less speculative
perspectives depending on the specific interests pursued by the party
signing the contract.
Attention here will focus on derivatives regarding currency (currency
options, currency futures, and currency swaps), commodities (commod-
ity options and commodity future), and interest rates (interest rate swap).
The logic that is followed will be that of the subscriber (company) using
derivatives as hedging instruments, while having at all times to consider,
in order to make an appropriate choice of instrument, the speculative
potential of each. Moreover, we shall dwell exclusively on the instruments
for hedging against exchange risk, typical of companies purchasing and
selling from non-EU countries.
The simplest derivative instruments are forward contracts, which
involve purchasing or selling a certain quantity of underlying activity at a
pre-established maturity, and at a pre-established price (forward price).
3
Institutional investors have also proven particularly interested in these: as holders of bonds issued
by a party that might be insolvent, because the party belongs to a “difficult country,” they may wish
to separate and, therefore, transfer the credit risk inherent to their position, and thus remain
exposed to interest rate risk alone.
These instruments lock in the price or exchange risk associated with a

given transaction, because the subscriber signs a contract today in which
the elements are established and cannot be modified. It is an over-the-
counter instrument, whose features are negotiated between the company
and the financial operator.
However, precisely the fact that prices (or exchanges rates) are fixed,
and that, therefore, the subscriber has had no opportunity to take advan-
tage of their favourable variations, leads companies to use other derivative
instruments that are more complex and often characterized by higher
levels of risk.
Currency Futures
The futures contract is a bilateral agreement in which one of the parties
undertakes to buy or sell a certain fixed quantity of a commodity (com-
modity future) or of a financial activity (financial future) against a given
payment in money, at a certain future date. It is a standardized instru-
ment contracted in a market of its own (futures market). The standard-
ization lies in the fact that the future’s base elements (quotation,
denomination, mechanism of operation) are pre-established by the
Clearing House, the body that serves as a counterparty for all those oper-
ating in futures.
These instruments make it possible to take on purchase or sale posi-
tions in an activity without being required to have, at the moment of
bargaining, the resources needed to meet the assumed obligation.
The positions that may be taken are
–– short, equalling a sale of the underlying activities; and

–– long, equalling a purchase of the underlying activities.
In addition to quality, type, and price of the commodity or of the

financial activity that is the object of trading and the date on which the
exchange will take place, the futures contract also includes the place of
trading and the possible choices available to the seller for the delivery
procedure.
The elements of the future are as follows:

Position: Long = commitment to purchase; Short = commitment to sell.
• Denomination: fixed for each type of future and underlying activity,

indicates the standardized quantity of underlying activity represented
by a contract.
• Number of futures to be purchased; depends on the ratio between the
capital to be invested and the denomination.
• The quotation, to be monitored daily, is the forward price of the
underlying activity in the futures market.
• Nominal value = number of futures for the Denomination.
• Face value = countervalue of the nominal value.
• MI (initial margin) = percentage of VF that operators pay at the
moment of signing in order to open the margin account.
• MV (margin of variation) = VF1−Vfo
• Margin call = 75% of the initial margin (MI)
The function of futures revolves around the “marking to the market”

mechanism: every day, the subscribers’ positions are crossed (pure
accounting operation) with opposite positions in order to verify any cred-
iting or debiting of the margin of variation.
Example: Subscription (purchase) of a future, long × short position
1. Purchase (long position) at start of day underlying the start-of-day

quotation
2. End-of-day offset with sale (short position) of underlying activity of
quotation existing at end of day
3. the next day, the initial long position is reopened at the previous end-
of-day quotation and returns to points 1 and 2 until the future’s matu-
rity or until the process is interrupted at the will of the operator that
subscribed the future, or in the cases in which the operator cannot
compensate the margin account.
The objective of those subscribing the future is in fact to earn financial

income (margins of variation) and, where applicable, to use it to offset
the losses suffered in the real market (commodities) or the currency mar-
ket (currencies). If the operator initially took a long position, it is offset

daily with a short position if the face value increases, and the margin
account is credited if the VF increases, and charged if it diminishes. To
the contrary, if an operator has initially taken a short position, this is
offset with a long position and the margin account is credited if the VF
decreases, and is charged if the VF increases.
Based on this mechanism, operators speculating on VF increases will
take long positions (to offset short); those speculating on VF decreases
will take short positions (to offset long). Specific interest accrues on the
sums credited and debited. Should the balance of the margin account fall
below 75% of the initial value, the counterparty is required to call the
margin, which is to say to bring the margin account’s balance in line with
the initial margin value. If the operator does not do so, the Clearing
House closes the account, compensating the future with a position
opposed to the initial one.
Example: dollar/euro currency future
In the currency future, the underlying activity is the foreign currency,
and therefore
–– the denomination is the standardized quantity of foreign currency

drawn from the future (e.g. $100) and
–– the quotation is the forward price of the foreign currency.
To simplify bargaining, only the case of a quotation expressed as the

forward exchange in force on the European Monetary Union (EMU)
market is hypothesized
(e.g. 1 euro = 1, … $ and therefore expressed as 1, … $)
In this way, it will be easy to identify the variation of the quotation and
of the face value on which the operator wagers.
Let us consider an example:
Suppose that an Italian exporter is owed a $50,000 debt by US cus-
tomers, and wishes to cover itself with a future having the following
characteristics:
T = $10, 000
Q = $1.27
The exporter fears an increase in the euro/dollar exchange; given that

the quotation is expressed as the exchange (N.B. the euro is quoted as
“direct or indirect”), the exporter wagers precisely on the increase in Q.
We may calculate the number of futures so yielded as 50,000/10,000 = 5.
The exporter thus subscribes five contracts.
Let us use the proportion to calculate VF.
€1:$1.27=VF:VN.
Therefore, VF = 50,000 × 1/1.27.

Even without doing the calculation, it may easily be noted that the
increase in the quotation would entail a decrease of the VF and, there-
fore, with these data, the exporter may be covered by taking a short posi-
tion to offset the long.
In subsequent days, the MV is credited or debited depending on
whether the quotation actually increases (decreases of VF) or decreases.
The calculation of VF is at any rate important for calculating the initial
margin and margin call.
Currency Options
Options are contracts with which the right (not obligation) is taken on to
purchase (call) or sell (put) a certain quantity of underlying activity (currency
or commodities) at a pre-established price or by a pre-established deadline.
Options are defined as European if they may be exercised only at
maturity, and as American if they may be exercised until maturity. There
are standardized over-the-counter options, but the operating mechanism
is the same.
The elements of the option are as follows:
• Strike price (X). This is the pre-established (forward) price at which

the subscriber of the call (put) may buy (sell) the underlying activity;
• Premium (Vo), which is the price at which the subscriber may sub-
scribe the option and is always owed by the operator when the contract
is signed. It expresses the value of the option.
Options are referred to as “in the money” if, at the time of subscrip-
tion, the strike price is lower than the market price. They are referred to
as “at the money” if the strike price and market price are the same. Lastly,
they are defined as “out of the money” if, at the time of subscription, the
strike price is lower than the market price.
In the case of the CURRENCY OPTION, the underlying activity is a
foreign currency, and to make calculations of benefit in euros and, there-
fore, to understand the countervalue in euros of the operations, it is nec-
essary to convert the strike price (which is in practical terms a forward
exchange) into euros, and to calculate the countervalue in euros of the
spot exchange expected for maturity and of the exchange at maturity.
X = 1/SP, where SP is the strike price

St* = 1/Cpa, where Cpa is the spot exchange expected by the operator for
maturity
St = 1/Cps, where Cps is the spot exchange at maturity
CURRENCY OPTION CALL (importer’s hedge):
St ∗ − X − Vo > 0
The operator subscribes the call because, according to its expectations,

the option will allow it to purchase the foreign currency at a more benefi-
cial exchange (SP>Cpa), and thus to save on the countervalue in euros.
St − X > 0
The operator removes the premium because the SP is effectively greater

than the spot exchange at maturity, and therefore saves on the purchase
of foreign currency.
St − X − Vo > 0
The operator has gained an advantage because it has saved, on the pur-
chase of the foreign currency, an amount greater than the premium it
paid.
CURRENCY OPTION PUT (exporter’s hedge)
X − St ∗ − Vo > 0
The operator subscribes the PUT because, according to its expecta-

tions, the option will allow it to exchange the foreign currency in euros
(sell currency) at a more beneficial exchange than the market one
(SP < Cpa)
X − St > 0
The operator removes the premium and sells the currency at the strike
price (SP < Cps)
X − St − Vo > 0
The operator has gained an advantage because, with the option, it

obtained a remuneration in excess of the premium paid.
Currency Swaps
These are contracts signed between two parties, through which each party
takes on the obligation to make fixed or variable periodic payments. They
serve mainly to hedge against interest risk since they make it possible to
transform the cost of financing from fixed to variable or the other way
around, or to obtain savings on the payment of financial charges by
exchanging the rate obtained from one’s own credit institution with that
received by the counterparty from another credit institution.
They may also serve to hedge against exchange risk.
To hedge against exchange risk, improper use may be made of a cur-
rency swap. This entails commitment to a pair of opposing operations on
the same notional capital (foreign currency).
In the currency swap, the elements are all known, so operators can
make a calculation in advance in order to verify the benefit of the
operation.
With a view to hedging, operators may plausibly choose, as a forward

operation, the one that serves as a hedge. The importer will then verify
the benefit of making a spot sale and a forward purchase of foreign
currency. In this way, it will have, at maturity, the currency it needs to pay
foreign suppliers.
The exporter, on the other hand, will verify the benefit of making a
spot purchase against a forward sale of foreign currency (sale of foreign
currency received from the foreign supplier).
Example 1: Spot sale of dollars and forward purchase of dollars
(importer’s hedge).
Supposing that the underlying activity is $1, the importer will make
the following calculation of benefit, and will make the swap only if the
result (R) is greater than zero.
R = 1 − 1 + Interest on euros − Interest on dollars converted into euros

Cp Ct
R = 1 − 1 + Ie − I$
Cp Ct Ct
–– Where 1/Cp is the countervalue in euros of $1 calculated at the

exchange Cp.
–– It expresses the countervalue the importer obtains from the spot sale of
$1.
–– 1/Ct is the countervalue in euros that the importer pays for the for-
ward purchase of $1.
–– Ie is the interest in euros that the importer earns by investing, for the
duration of the swap, the euros obtained from the spot sale of 1
dollar.
–– I$ /Ct is the countervalue in euros of the interest in dollar that the
operator renounces due to having spot-sold the dollar.
From the calculation, it may easily be understood that the operation’s

benefit depends greatly on the differential between interests, and there-
fore on the interest rate differential.
Example 2: Spot purchase of dollars and forward sale of dollars (export-

er’s hedge).
Example for $1 negotiated.
−1 1 I$
R= + − Ie + ,
Cp Cp Ct
If R > 0, it is beneficial to perform the operation.

In this case as well, the benefit depends greatly on the interest rate dif-
ferential. In fact, the swap is an improper hedging instrument: to be cov-
ered, it is enough to make a forward contract for the forward sale of
currency (exporter) or for the forward purchase of currency (importer).
Operators choose the currency swap instead of forward precisely to spec-
ulate on the interest rate differential.
rice Risk Hedging and Value Creation: Some

P
Evidence from Jet Fuel
Rising oil prices have led many airlines to hedge prices, considering
that, according to estimates by the International Air Transport
Association (IATA), fuel is these companies’ second largest cost
item. Lin and Chang (2009), in a sample of 69 airlines in 32 countries
during the period from 1995 to 2005, examined the sources of the
hedge premium for jet fuel. These companies are subject to significant
risk due to volatility, which allows the sources of added value derived
from fuel hedging to be investigated by using the data from global
airlines.
The results of the study show that jet fuel price hedging increases the
value of airlines throughout the world. In particular, airlines residing in
the United States that practise fuel hedging increase their value, while
airlines that do not reside in the United States contribute no added value
to their enterprises.
Like other industry operators, airlines protect themselves from fuel
price risk through hedging. This is a relatively recent practice: before 1985,
airlines did not hedge fuel risk, although they were already practicing
c urrency hedging. Even today, some airlines are not hedging this risk with
financial instruments, but simply pass price increases along to the final
customers: this is the case, for example, with Lufthansa and FedEx, which
shifted fuel price increases onto the final customers in the cargo sec-
tor (Morrell and Swan 2006). However, this solution is difficult to put into
practice in passenger transport, given the strong industry competition.
Airlines have the possibility of trading various types of financial instru-
ments useful for hedging both jet fuel and oil. Jet fuel can only be traded
OTC (over-the-counter—i.e. outside the regulated markets, with no
clearing house), and its liquidity is certainly lower than oil, which can be
traded on the regulated markets NYMEX (United States) and IPE
(Europe). Generally, contracts do not exceed 12 months, with 80% of
contracts not exceeding three. Various types of contracts are used: for-
ward contracts, futures contracts, and derivatives like options, collars,
and swap.
Forward contracts are not traded on regulated markets, but directly
among counterparties (OTC), which spot fix price and quality of the
underlying asset. There is counterparty risk, given the possibility of one
of these ending up bankrupt prior to the contract’s expiration. The air-
lines’ fuel suppliers, like AirBP, use forward contracts, which are less con-
venient for speculators (Morrell and Swan 2006).
Futures contracts, on the other hand, are designed both to hedge fuel
risk and to provide protection from counterparty risk. The supplier
accepts shipping the counterparty a given amount of the underlying asset
(in this case, oil) at a given price (the “strike price”) on a given future
date. In general, the position is in almost all cases reversed upon the con-
tract’s expiry, in order to avoid the physical delivery of the underlying
asset. According to NYMEX, fewer than 1% of contracts end with the
physical shipment of the underlying asset.
Oil futures are traded on two leading regulated markets: NYMEX
(New York) and IPE (London). Each futures contract that is signed cor-
responds to 1000 barrels of petroleum (West Texas Intermediate or Brent
Crude Oil). These may be signed every month, up to two years in advance
and with a duration of up to three years.
Often, companies in the sector rely on options as well. When exercis-
ing the option, the purchaser is in a position analogous to that of futures.
Call options allow price increase risk to be hedged simply by paying the
premium, without requiring an operating margin. This financial instru-
ment can therefore also be used in the event of economic difficulties
which, of course, would not permit the purchase of margin instruments.
Jet fuel options are rarely traded, and are OTC. Therefore, there is the
risk of both counterparties—a risk from which it is necessary to protect
oneself further. On the other hand, Brent gas oil and crude oil options are
available, which may be traded on the IPE regulated market.
Lately, airlines have tried a special combination of call and put options,
defined as “collar.” A call option is purchased for protection against price
increases, and at the same time a put option is purchased to protect also
against the risk of the market going in the opposite direction.
The premium of the call option will be greater than the put option,
and therefore where the call is exercised, the profit lies in the difference
between what is collected by exercising the call option and the lost pre-
mium on the put option. If the market trends in the reverse, the put
option is exercised, in which the earnings will partially hedge the loss
paid on the call.
Another financial instrument that can be used is that of swaps. Swaps
are customized futures contracts through which airlines lock in the fuel
price. The airline purchases a swap at a given strike price for a given quan-
tity of jet fuel per month. The current price is compared every month
with the strike price, and where it is higher, the airline receives the added
value in comparison with the strike and, conversely, will pay the counter-
party the loss on the strike where the price is lower that month.
Turner and Lim (2015) examined four commodities (West Texas
Intermediate (WTI), Brent, heating oil, diesel fuel) typically used by air-
lines to cross-hedge jet fuel.
Airlines have had conflicting results with hedging, and the general feel-
ing on the part of both airline executives and scholars is insecurity regard-
ing the procedures for hedging their own positions on fuel. While some
articles have suggested that, due to the shortcomings of an ordinary least
squares (OLS), a more advanced model should be used, this study does
not draw the same conclusions. Other models, such as ECM and the
generalized autoregressive conditional heteroskedasticity (GARCH),
generate hedge ratios similar to OLS.
After the simulations, the results by Turner and Lim (2015) demon-
strate that no model clearly and consistently generates a hedge ratio bet-
ter than the other models. This study shows that airline cross hedges
created with futures should use oil as the base product.
Since fuel oil is a refined petroleum product, its price comes close to
other fuels. Moreover, with a daily hedge horizon, diesel fuel is inferior to
the other three petroleum products, and is less effective for hedging the
fuels, regardless of the moment of the contract’s expiration, but its perfor-
mance improves with a weekly hedge horizon. Moreover, airlines that
hedge futures would create the most effective hedge by using contracts
expiring at three months for fuel oil, but the hedge’s effectiveness dimin-
ishes as the time to reach the contractual expiration increases.
However, based on the in-sample analyses and the results of the Monte
Carlo simulation, also with fuel oil, the hedge’s performance is 67%
lower for the hedge’s effectiveness. Performance improves up to about
71% with a weekly hedge horizon. The results reached by Turner & Lim
(2015) might therefore be sensitive to the hedge horizon.
To have a more holistic view of the hedge’s performance and of the mod-
el’s use, the hedge’s duration should be carefully examined in future research
to associate the frequency of the data with the planned hedge horizon.
An interesting example is that of Delta Airlines (Carter et al. 2006),
which maintained high hedge percentages. In particular, at the end of
2002, the company had hedged approximately 65% of its fuel require-
ment for 2003 but increased its exposure during the period after the 9/11
attacks, believing that the industry crisis would be a short one. At the end
of 2003, Delta’s long-term debt reached 48% of total assets, against the
27% recorded in 2000, with approximately $1 billion coming due in
2004. During the 2001–2003 period, Delta posted operating losses for
nearly $3 billion, even as it made interest payments for $1.9 billion. In
February 2004, Delta liquidated the hedge contracts existing on jet fuel
to collect $83 million in cash, leaving the airline totally exposed to future
price shocks.
The positive link between hedging and value creation is confirmed by the
fact that for European airlines, growth in EBIT (earnings before interest and
taxes) bears a significant negative correlation with systematic risk (Lee and
Hooy 2012). This means that when EBIT grows, the value of β must fall.
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6
The Role of Culture
in Internationalization
The Key Role of Cultural Competence

In addition to the growing degree of internationalization of companies,
globalization also brings with it a trend towards an increasingly high
mobility of human resources, factors that make companies—regardless of
size, and with intensities differing by sector—multicultural environ-
ments, in which people from different countries meet and work together.
These people reflect different working cultures. They are inspired by dif-
ferent values, filter their actions through different beliefs, and need to
create multicultural teams, finding a way to help people work well
together.
Moreover, globalization provides the opportunity to sell worldwide
and to expand activities based on the specific advantages of position. But
while geographic distances grow smaller, psychological distance survives,
and consumers sometimes perceive multinationals as an expression of
cultures they do not like, or of countries they see as overassertive and
dominating. This implies the need for companies to work on their cus-
tomers’ perception, seeking to adapt their products, and at times their
image, to specific contexts.

https://doi.org/10.1007/978-3-319-91551-7_6
Any type of international relationship requires cultural adaptation: dif-

ferent values meet, and companies must find a balance between their
culture of origin and the one that hosts them. Globalization cannot be
understood as standardization. Even Coca-Cola, Starbucks, and
McDonald’s, considered emblems of globalization, have abandoned the
hypothesis of thinking globally and acting globally, seeking to strike the
right balance between the need to preserve their own image and corpo-
rate philosophy on the one hand, and, on the other, to adapt to different
markets in order to seize the opportunities they offer.
In this balancing process, managers play a key role because they oper-
ate as an interface between markets and the corporation. Expatriates in
particular must learn the rules of the host market, comprehend how cul-
tural diversity impacts the company’s ability to successfully operate in the
specific market, and share their knowledge with the corporation in order
to activate a virtuous process of organizational learning.
The success of an internationalization strategy is strongly conditioned
by the managers’ learning capacity—a capacity impacted by the manag-
ers’ knowledge base, their propensity to acquire new knowledge, and an
organizational climate that positively assesses the ability to deal with and
integrate the new. Through adaptation processes, expatriates learn the
culture of the various settings, and develop the ability to value diversity
in order to optimize relationships (Mendenhall et al. 2002; Stroh and
Caligiuri 1998).
With respect to culture and the role of cultural diversity, Boisot (1998)
in his book on Knowledge Management, defines cultural knowledge as
the managers’ awareness of the existence and value of cultural differences.
Cultural knowledge is the cognitive basis of the process but is not on its
own enough to guarantee companies success on international markets:
managers not only have to be aware of the value of diversity, but they
must also be able to exploit this awareness to achieve profitable results. It
is in this perspective that the concept is introduced of cultural compe-
tence (Calvelli and Cannavale 2013), understood as managers’ ability to
make efficient use of cultural knowledge, which is to say the ability to
recognize, acquire, and combine cultural knowledge in the most profit-
able way possible. Cultural competence impacts the propensity of indi-
viduals to share knowledge and to recognize and assess key information
The Role of Culture in Internationalization 167
(Magala 2005), and may also be defined as the ability to recognize and
combine diversity by emphasizing the positive impact it has on the man-
agers’ willingness to open to diversity and accept the ideas and knowledge
of others (Stier 2006).
In more recent years, managers of multinationals have also been recog-
nizing the key role of cultural competence for companies’ competitive
success. The results of the research done by Uber Grosse (2011), which
analysed the importance, as perceived by international managers, of pos-
sessing cultural competence, show that the interviewed managers are,
above all, aware of the negative consequences that may derive from cul-
tural incompetence; in the second place, again according to the inter-
viewees’ perceptions, cultural competence significantly impacts the
running of the business, aptitudes, communication with overseas part-
ners, and regulations.
The concept of cultural competence is not a new one. Many authors, in
fact, albeit using different terminologies, deal with the issue. Stone (2006)
speaks of intercultural effectiveness and Heyward (2002) of intercultural
literacy, while Deardorff (2006) introduces the term “intercultural com-
petence.” Hunter et al. (2006) define “global competence” as “having an
open mind, while actively seeking to understand the cultural norms and
the expectations of others, exploiting this acquired knowledge to interact,
communicate, and work effectively outside one’s own environment”
(Hunter et al. 2006, p. 270).
With reference to the multitude of definitions that often evoke simi-
lar—but not equal—concepts, Deardorff (2006) maintains that the lack
of specificity in the definition of intercultural competence is due to the
difficulty of identifying the specific components of this concept. The
author offers a broad understanding of intercultural competence, defin-
ing it as “the ability to communicate effectively and adequately in inter-
cultural situations thanks to the possession of one’s own intercultural
knowledge, skills, and aptitudes” (Deardorff 2006, p. 247). Stone (2006)
comes closest to the RBV concept of competence, stating that “intercul-
tural effectiveness” is “the ability to interact with people of different cul-
tures in order to optimize the likelihood of mutually successful
results”(Stone 2006, p. 338).
Within the context of cross-cultural management studies, one of the

first contributions on the issue is offered by Adler and Bartholomew
(1992, p. 53), who define the competence of the global manager as the
ability to learn the perspectives and practices of different cultures, to be
able to work simultaneously with people from diverse cultural contexts,
to adapt to cultures distant from one’s own, and to be capable of interact-
ing with colleagues from different backgrounds.
In a manner not unlike Adler and Bartholomew, Black and Mendenhall
(1990) and Hofstede (2001) focus their attention on intercultural com-
munication and define cultural competence as the ability to communi-
cate and interact with people from different contexts.
Summarizing the authors’ perspectives, Johnson et al. 2006 seek to
offer a definition that takes account of the various aspects mentioned and
define cultural competence as the ability to operate effectively in cultural
settings different from one’s own. According to the authors, this ability is
the result of three interdependent factors: the managers’ personality,
which must be open to innovation and dialogue; the cognitive dimen-
sion, understood as how individuals learn and categorize diversity; and
the behavioural dimension, related to the way in which people commu-
nicate with others. Communicative skills and the cognitive sphere may
be developed through suitable training processes; the personal dimen-
sion, on the other hand, is the result of the individuals’ personality, their
individual culture, and the socialization processes they experience in their
lifetimes. Acting upon all three factors is the organizational dimension: a
culture that values the impetus towards change and fosters the acceptance
of diversity is undoubtedly a necessary support for implementing cultural
competence which, lacking this, remains an individual ability, of little use
for building a competitive edge (Calza et al. 2013).
The need to develop adequate cultural competence becomes even more
important the greater the distance between the home and host culture is.
Although potentially advantageous in terms of knowledge enrichment,
predisposition to accepting diversity, and the acquisition of knowledge
about different planning and problem-solving systems, cultural distance
raises the risk that the workers and customers on the foreign market
might be closed to the company’s products and knowledge.
It is often found that in settings characterized by a high degree of

refusal to accept cultural diversities, closure may be caused by fear of los-
ing one’s own identity. This may be managed through categorization pro-
cesses that lead to accepting the similar and refusing the different, assessed
simplistically on the basis of such visible factors as skin colour, language,
religion, and so on. In these settings above all, the company must learn to
take root, to adopt behaviour respectful of the setting’s social norms, that
allows potential interlocutors—be they customers, workers, or other
stakeholders—to perceive a smaller distance between their own culture
and that of the foreign company.
Cultural distance, understood as the difference between cultural values
characterizing the partners’ national culture, conditions the processes of
knowledge transfer and knowledge sharing within the new organization,
and offers important inputs to organizational change.1
Inter-organizational relationships, whether competitive or collabora-
tive, offer companies the possibility to augment their knowledge base and
increase the use of the resources they possess (Hitt et al. 2000). Indeed,
ability to explore2 appears to be one of the leading sources of competitive
advantage for companies that require an ongoing review of accumulated
knowledge in order to remain on the frontier of innovation at all times.
Entry into culturally distinct markets requires companies to be able to
develop policies capable of dealing with market conditions that are often
quite different from those in the country of origin. In so doing, it
1
In keeping with the RBV, strategic international alliances also offer partners the possibility to earn
more profits from the combination of resources possessed; to expand the use thereof thanks to the
combination of partners’ competences; to limit, on the part of the individual company, the use of
resources necessary for the development of the new activity; and to reduce knowledge transfer costs,
guaranteeing closer contact among the players and, therefore, greater permeability of the partners’
knowledge base (Tsang 1998). Moreover, inter-organizational relationships allow companies to
improve the coordination of their activities (Buckley and Casson 1990), and offer small- and
medium-sized enterprises the possibility to overcome the structural limits that characterize them,
and to penetrate into highly competitive markets (Steensma et al. 2000; Tsang 1998; Lorenzoni
1990).
2
Koza and Lewin (2000) stress that, in agreement with March’s definitions (1991), the adaptation
process may have a dual purpose: exploitation, if the company aims solely at making better and
deeper use of its capacities; and exploration, if the company aims at developing new knowledge
while trying out new solutions. Strategic alliances can therefore pursue a dual objective: simple
exploitation of the knowledge possessed by partners, and increasing the accumulated knowledge
base of the allies through the development of new knowledge-based resources.
i dentifies international strategic alliances as the ideal way to augment and

increase the competence possessed by combining the company’s assets
and knowledge with the partners’ base of accumulated knowledge (Koza
and Lewin 2000).
Alliances are a source of opportunity both for the partner implement-
ing the internationalization strategy and for the local partner: for the
former, diversity and the foreign partner’s intensity of learning facilitate
the acquisition of local knowledge and strengthen the company’s perfor-
mance in the host country (Luo and Peng 1999; Makino and Delios
1996); for the latter, learning from the partner company contributes an
important road for developing managerial, organizational, and techno-
logical knowledge, and in that sense creates opportunities for better per-
formance and greater likelihood of survival (Fahy et al. 2000; Lyles and
Salk 1996).
Stable cooperation eases the processes of transfer of tangible and intan-
gible resources (Jarillo 1988; Walker and Poppo 1991; Alston and
Gillespie 1989; Beamish 1988; Contractor and Lorange 1988), but the
concrete sharing of knowledge (Morrison and Mezentseff 1997) is pos-
sible only if the partners construct a background suitable for learning,
laying the foundations for establishing a learning alliance (Senge 1992).
This background is based on a clear legitimization of the purposes of the
alliance, on the transparency of these purposes, and on the ability to
build relationships based on trust rather than on opportunism. These are
not simple factors; to the contrary, trust is impacted by the partners’ cul-
tural compatibility which, in turn, depends on the perception they have
of the distance existing between their cultures (Calza and Cannavale
2014), and on their ability to learn the partner’s culture, while recogniz-
ing the value of diversity (Stier 2009).
International collaborations are, in fact, characterized by a high rate of
dissolution (Hennart et al. 1998), which often results from low comple-
mentariness among the partners (Park and Ungson 1997) and from their
opportunistic behaviour (Porter and Fuller 1985; Hamel 1991; Park and
Russo 1996).
A study by Koza and Lewin (2000) on international strategic alli-
ances shows, indeed, that managers recognize as main causes of
alliances’ failure the following factors: the lack of trust and of effective
cooperation among partners, negotiations that are excessively regulated

a priori, the little attention these managers pay to the emergence of
problems within the alliance, cultural misunderstandings, bad strategic
planning, and a careless selection of partners.
Ideally, both partners in a collaboration must learn as much as possible
from one another, in a relationship in which new values and new norms
can be created by joint needs (Parkhe 1991). A shared culture, in fact,
attainable by objectifying the success derived from using skills, reinforces
cohesion, improves communication and, in the degree to which it
approves an organization’s ability to act as a unit, makes it possible to best
express the new company’s distinctive skills by triggering a virtuous circle
that involves the following phases: exercise of distinctive competence, the
collective experience of success, idealization, stabilization of values and of
the symbolic field, cohesion, and organizational efficiency (Gagliardi
1995).
All the authors analyse the concept of inter-culturality and, therefore,
the ability of individuals to comprehend the phenomenon, in response to
globalization and internationalization. The objective of the analysis is to
identify the capacities to be developed and the methodologies to be used,
and therefore most are linked to the themes of the learning and training
of human resources. Although originating from distant fields, these soci-
ological and psychographic analyses can be highly useful to companies
that are preparing their expatriates; their objective is to draw the greatest
possible contribution of knowledge from international assignments and,
subsequently, from their repatriation.
In fact, in a broader social perspective, the cultural differences within
a community characterized by the presence of different cultures may give
rise to misunderstandings or errors in communication (Stier 2006), con-
flicts, and anxiety (Jiang 2006). To avoid these problems, it is necessary
to be actively involved not only in understanding diversity but also in
negotiating between different cultural orientations, and in managing the
differences in such a way as to foster a harmonious development of the
community itself (Heyward 2002; Stier 2006). This is what takes place in
modern companies, characterized by the presence of diversity within, and
highly oriented towards internationalization. Management must be able
to understand and handle diversity, and this process requires a planned

activity of negotiation—or better, mediation—between the different
beliefs and values that are manifested within the company.
But Why Is the Context’s Culture So Important?
The introduction of a new market, whether one of procurement or out-

let, implies the need to work within a different cultural context: different
rules, different behaviour, and different social norms can make coordina-
tion difficult, and may have a significant impact on the company’s com-
munication and image (Gehrke and Claes 2014; House et al. 2004;
Morosini et al. 1998; Weber et al. 1996; Altman and Baruch 1998; Melin
1992; Adler 1986).
In extreme summary, leaving behind the positivistic approach of the
models based on cultural dimensions, three fundamental aspects of cul-
ture may be pointed out, and the important implications they have at the
company level may be considered.
The first aspect is hierarchy: while in certain contexts, the hierarchy is
rigid and essential for guarantee the registration of activities, in others,
the hierarchy is more flexible: people accept the leader, but they do not
feel overseen, or inferior.
In these settings, hierarchy is connected with the working environ-
ment and has no impact on the social relationship. To the contrary, in the
former, hierarchy also influences social life. Hierarchy has its foundation
in the essential assumptions that crystallize over history, influence the
country’s educational system, and are handed down through social insti-
tutions, first of all the family. The Confucian ethic, based on the five
hierarchical relationships, is an important example of this, but similar
conditionings that individuals submit to in order to respect inequalities
and positions of subordination derive from certain Western religions like
Catholicism or even Islam, which educate individuals to have uncondi-
tioned respect for God’s will, thus inducing a sort of fatalism and, there-
fore, a low orientation towards action and proactiveness.
At the company level, the sense of hierarchy impacts the way in which
decisions are made, the management of communication processes, and
the accountability of individuals who do not hold positions of impor-

tance inside the organization. A strong sense of hierarchy will result in a
prevalence of top-down communication, of centralized decision-making,
and of limited accountability and proactiveness among employees who
will be used more to obeying—or at any rate to carrying out directives—
than to contributing to decision-making and expressing their ideas.
Another fundamental aspect, linked to the context’s culture and there-
fore to the values prevailing within it, thus conditioning the actions and
behaviour of individuals, is represented by the individuals’ inclination to
see themselves as part of a group, or as independent. This inclination,
commonly known as the tendency to collectivism in the former case and
to individualism in the latter, has many implications for company
activities.
In collectivist cultures, people are educated to place the group’s inter-
ests before the individual’s, to sacrifice themselves for the collective good.
Group harmony is very important, and individuals explore the group’s
consensus before expressing their own ideas on changes or innovations,
thus slowing the process of generating new ideas. Harmony leads people
to remain for a long time in the same group, employee turnover is lim-
ited, the sense of belonging is strong, and the group’s decision is always
accepted. People are inclined to teamwork and make an effort to achieve
the expected results so as not to discredit the team. Personal commitment
and emotional involvement have a dual origin: the individual does not
wish to fail, because he or she fears the group’s judgement, but also
because failing would draw attention to the group’s error in placing exces-
sive hopes in his or her ability to complete the task. In Asian cultures,
Confucian in particular, this tendency becomes very strong, and is con-
nected to the principle of saving face, in both its active and passive sense.
They refer to the team for any problem, and also for solving problems.
To the contrary, in individualistic culture, people are educated to
respect the needs and feelings of individuals. The starting point for ethi-
cal, social, and work-related decisions is the individual, and the protec-
tion of individual rights takes on a central role. This results in greater
speed in generating new ideas, which, however, may be slowed in the
implementation phase due to the lack of planning, and to competition
between individuals. People try to solve problems independently, and
wish to show their personal values. Competition within the team is

accepted as natural. The team is temporary; it is a way of working, not an
idea for living, and teams generally exist so long as people are achieving
goals. The negative aspect of individualism is a certain tendency towards
opportunism.
In summary, individualism and collectivism influence the philosophy
of work and problem solving, but they also have interesting effects on
openness to change and innovations.
The third fundamental aspect explored by the various authors that
have made important contributions on the subject is the impact of
national culture on people’s inclination to accept change and innovation.
The acceptance of change and innovation is strongly influenced by the
trend, in some cultures, to preserve traditions, value the past, and feel
threatened by the new. This aspect of culture has major implications for
companies. Above all, openness to innovation is linked to technological
innovation, but also to any other type of innovation: organizational, stra-
tegic, and market innovation. Some cultures are more inclined to con-
sider these changes as something precious, to feel stimulated by them,
while others consider the changes too risky and prefer to keep on doing
things as in the past.
When innovation is welcomed, the development of new products or
investment in faraway countries will be considered a possible source of
profitability, and an interesting challenge. Conversely, when people fear
change, innovation will be far more incremental and connected to pro-
cesses more than products; internationalization will be more gradual,
with a preference for similar countries.
Openness to change also has an impact on the organization. If people
wish to preserve traditions, they will tend to accept employees similar to
previous ones. Cultural diversity will be minimum, and some gender dis-
parities might exist within the organization. Proximity to diversity can be
reinforced by collectivism, creating a sort of clan within the organization.
In summary, people’s inclination to accept change has an impact on
innovation and on openness to diversities. From the standpoint of
consumers, it also has an impact on their inclination to try new products
and to change habits; consequently, it has an impact on the consumers’
behaviour.
As the overcoming of the ethnocentric hypothesis has shown, diversity

cannot be ignored, but the need to preserve unitariness and efficiency, on
the other hand, imposes the need not to adapt completely, and to avoid a
polycentric approach that would easily lead to the disconnection of the
corporate system. Only through a planned adaptation, what the English-
speaking world calls “acculturation” and “adjustment,” can balance be
preserved. The manager’s skill, then, becomes that of understanding what
diversity to value, and what values can, instead, be downsized or adjusted
with respect to the home culture. It is an ability that, like all distinctive
skills, is self-nourishing. It is linked to experience and to the group in
which it is developed, and to bring value, it must take concrete shape in
specific initiatives that are useful for improving the perception that the
host culture’s individuals have of the home culture.
Cultural distance is a given: it depends on the difference that exists
between practices and values prevailing in different contexts. However,
the perception individuals have of the distance can be reduced, and it is
precisely for this purpose that cultural competence is essential. The ability
to adapt to what is different depends on the ability to grasp the values
underlying behaviour—values that condition the communication pro-
cess, thereby resulting in a greater or lesser propensity of the local stake-
holders to adopt the messages that are transmitted, and to share
information.
But What Is Culture?
A people’s culture is a consistent set of fundamental assumptions that a

given group has invented, discovered, or developed, by learning to face its
problems of external adaptation and internal integration (Schein 1984). At
the level of context, external adaptation involves facing the natural and
geographic conditions of a given area, marked by the vicissitudes of histori-
cal events that, over the course of time, have influenced the evolution of
the society operating in it. Internal integration, on the other hand, may be
understood as seeking and implementing “glues” which, through the shar-
ing of language, norms, and values, guide individuals’ behaviour, condi-
tion the formation of moral principles, and orient their ethical conduct.
House et al. (2004) accord strong importance to geography and to the

environmental conditions of the various contexts, factors that impel peo-
ple towards a greater or lesser degree of sociality, rather than towards
seeking greater independence or interaction and so on. However, looking
to the contexts in terms of country, physical geography is not in and of
itself sufficient for understanding the cultural dynamics that characterize
their different areas. In fact, it is not rare to encounter the presence of
subcultures and countercultures within the same nation. Emblematic of
this is the case of Italy, a country marked by a multitude of subcultures
that, in some cases, become antithetical to one another.
Therefore, analysis of cultural determinants requires more in-depth
analysis. The birth of the current nations is a recent event, in some cases
still undefined, and it is therefore necessary to look at history to under-
stand the transitions taking place in various areas of the planet and the
prevalence, in different areas of the same country, of essentially different
values and behaviour.
Historical perspective, albeit not very widespread, leads to interesting
considerations. The weight of historic events appears, in fact, to be the
only key to interpretation of use for explaining the similarities among
European countries that are apparently quite distant; but it is also useful
for grasping the differences characterizing certain Asian countries often
considered, in the eyes of Western scholars, to be far more similar than
they actually are.
Besides history, geography, religions, and level of socioeconomic devel-
opment are determinant factors of the differences in ways and customs,
with evident repercussions on the spoken language and on styles of com-
munication as well (Calvelli and Cannavale 2013).
According to the sociological theory of identity (Haller 2003), diver-
sity of language, religion, and the attained level of socioeconomic devel-
opment also feed the perception of diversity between cultures that,
limiting ourselves to the study of cultural dimensions, might appear simi-
lar or homogeneous. The result of the intercultural relationship depends
on two fundamental emotions: pride and shame. Pride emerges when
one’s identity is perceived as relevant and leads to the recognition of one’s
value, and to less fear of the other. To the contrary, when one’s own iden-
tity is rejected or denigrated, a situation of unease emerges, and leads to
mistrust and conflicts. The relationship, then, is influenced by self-

assessment by individuals, and by the assessment they develop of their
counterpart’s perceptions. If the relationship aims to involve people from
different contexts, individuals develop images that serve to preserve the
homogeneity of the group they belong to, also through the categorization
of the other. The greater the feeling of shame, the greater the tendency to
reject diversity, which is perceived as an attempt at colonization by cul-
tures that do not respect the beliefs and values of the community belonged
to.
The keystone of intercultural relations resides, then, in the ability of
the involved individuals to stimulate positive emotions which, depending
on the theory, are strongly connected to respect for diversity and to valu-
ing local habits and customs.
Looking at history in specific terms, the cultural contaminations
induced by the comparison between bearers of different cultures can con-
tribute to dulling the differences and emphasizing similarities and,
through a slow and gradual process, can even to lead to the creation of a
new culture; on the other hand, in this way, the melting pot, the mark of
the culture in the context of the United States, was born.
In a perspective of cross-pollination, the individualism and strong level
of competition typical of the US context have accentuated the will to
emerge in the Korean one: individual aspirations within the group are, in
fact, stimulated (Chang 1995), providing the possibility for the single
individual to emerge and elevate his or her status. The strong result ori-
entation characteristic of America’s culture and context has reinforced the
Korean trait of “working hard” to achieve goals,3 while the age-old
antecedent of Japanese domination contributed towards emphasizing
“Institutional Collectivism” and “In-group Collectivism.”4 This laid the
foundation for the formation of the strong government that—at least
3
In Korean companies, the impetus towards achieving results appears quite strong, and working
hours per person are among the highest in OECD countries (45.9 hours per week in 2003) (Yang
2006). Orientation towards competition also encourages Koreans to be rather aggressive in the
process of implementing projects: quite often, in fact, projects are completed even before the estab-
lished deadlines (Cho and Yoon 2001).
4
In Korea, the concept of the group takes on a rather restricted meaning, since Koreans place enor-
mous trust in their family members, their former classmates, and in persons from the same region,
while they have very little or even no trust at all for outside individuals (Chang and Chang 1994).
until the great crisis of 19975—followed policies not only of removing

market distortions but also of selectively orienting industrial develop-
ment and the development of large conglomerates: the chaebol (Kluzer
and Rabellotti 1990a, b).6
English domination in the Indian area, in inducing a thoroughgoing
assimilation of Western values and ways of acting that are considerably
more individualistic than traditional ones (Roland 1988), accentuated
the typical Hindu pragmatism that leads to perceiving Westerners as
superior and to accepting their practices and values, while submitting to
a hierarchical order that they themselves create in every kind of relation-
ship. Among other things, acceptance is seen as a positive step for per-
sonal development, rather than as a loss of cultural identity (Upadhya
and Vasavi 2006), while the religious philosophy of abandon and accep-
tance in the doctrine of karma, and of social subdivision in a rigid caste
system, has only accentuated these characteristics of Indian culture,
inhibiting local entrepreneurial impetus (Elder 1959; Kapp 1963) and
thus explaining India’s economic backwardness.
If colonizations have often led to cultural cross-pollination, accentuat-
ing or modifying certain characteristics of the contexts, geographic prox-
imity cannot, on its own, be considered a source generating assimilation
of diversities. A significant case is that of Mongolia: Mongolia’s culture is
quite different from the cultures of China and Russia,7 its two neigh-
5
Asian banks had made enormous loans to companies with the implicit assumption that the gov-
ernment would honour these loans in the event of bankruptcy, but as soon as they realized the state
would be unable to do so, they began to limit their own debt exposure, thereby triggering the crisis
(Campbell and Keys 2002). The resulting Korean bailout, coordinated by the World Monetary
Fund, imposed on Korea a harsh structural adjustment plan, aimed at the country’s economic
restructuring.
6
Companies were helped by tax exemptions, easy access to imports, an export-friendly exchange
rate, and the defence of local products on the domestic market, thanks to customs policy (Rabellotti
1995). Moreover, the Korean government allowed these companies to access foreign funds, guar-
anteeing loan payments in the event the companies were unable to make them. Foreign invest-
ments thus financed a large portion of investment projects, particularly until the late 1970s (Hattori
1997).
7
Despite the proximity of these two countries, which have still played an important role in
Mongolia’s history, the population is quite homogeneous and is 80% Kaer Ka (Mongols), with the
remaining 20% belonging to various ethnic minorities originating chiefly from Kazakhstan,
Durbat, Ba Yate, and Buryati. The national language is Kaer Ka, but Russian and English are com-
mon, and the most widespread religion is Lamaism (Tibetan Buddhism). Even today, 30% of the
population is nomadic and lives mostly on herding.
bours, since Mongolians have a social structure, a language, and religious

beliefs that are different from those of the Chinese and the Russians.
Ancient wars and dominations most likely contributed to the rejection of
Chinese culture and to limiting the spread of Chinese thought which, to
the contrary, influenced all the other countries in the area.8 The aversion
to China, which may be seen in the case presented in the following box,
has, among other things, favoured—in spite of the strong collaboration
with the Soviet Union—an approach to the Western world, and accep-
tance of values that were long rejected in the other countries with planned
economies.
The nomadic life, the tendency towards a spirituality less focused on
the group, and the impervious territory did not favour collectivism, but
rather the proliferation of forms of individualism and relational systems
reduced to members of one’s own family or tribe.
The Mongolian business system is affected by these cultural character-
istics of the context, since Mongols are prevalently nomadic and are used
to being paid based on their tasks, and not on preparation or seniority.9
Assumptions and Values

Religious beliefs are a central element of the analyses regarding the link
between the culture of contexts and business development, given the
strong impact they have on the moral rules of a collective society, and
therefore on individuals’ behaviour and their expectations. In fact, Leung
and Morris (2002) recognize religiosity, understood as the influence of
8
The lesser spread of Confucianism than Buddhism is most likely due to the greater exchanges that,
as early as the time of Genghis Khan, existed with India in comparison with China, and also to the
dearth of centralized institutional structures and educational institutions that permitted the spread
of a doctrine that, in China as well, characterized more the nobility than the people, and was taught
in a manner trickling down from the more well-off classes to the simpler ones.
9
Mongolian society was dominated by semi-nomadic tribal groups that carried out periodic raids
towards the territories to the south, a circumstance that led the Chinese to build the Great Wall.
The name Mongolia derives from the tribe of the famous warlord Genghis Khan, who went so far
as to explore India and Europe. In the fourteenth century, the Mongolian tribes saw their own
decline, and China grew in strength and managed to expel the Mongolian invaders for good. Over
the centuries, China embarked on a number of campaigns to colonize Mongolia, and Mongolian
independence came only in 1912, just nine years prior to the Russian invasion.
respect for religious practices on society, as one of the social axioms capa-
ble of conditioning the life of individuals and the relationships among
individuals within a group. In fact, religion also has a strong impact on
ethics and, consequently, on the way in which profit and business and
professional success are interpreted.
Anthropologists also emphasize the value of religion as a factor charac-
terizing a group’s identity. Rites, norms, and language, typical manifesta-
tions of religion, help reinforce an individual’s sense of belonging to his
or her community, and it is precisely the communities’ will to identify
practices that might help overcome moments of difficulty and reinforce
the sense of belonging to the group that would explain the proliferation
of religions in the various parts of the planet (Gaarder et al. 1999). The
term “religion” is to be understood in the broad sense, as the conviction
of the existence of transcendental personal or impersonal powers; in this,
it embraces all the professions and moral philosophies that, in determin-
ing the meaning of existence and the basic values of life, condition indi-
viduals’ morality and behaviour.
There are various types of religion: monotheistic, polytheistic, and
monolatry.10 Although the distinction among these three types of religion
appears simple, in actuality, one encounters myriad religious hybrids, and
one may see how professions of monotheism mix with polytheistic faiths,
and cults of various origin are blended into particular religious currents.
On the other hand, the religious precepts of apparently distant faiths
clearly overlap: the concept of zákat in Islam is not far from solidarity in
Catholicism; individual responsibility in Hinduism is no different from
the one in Protestantism; going back through the years, the Indo-
European pantheon does not differ greatly from the Greek or Roman
one.
Albeit in the consideration that the interpretation of religious beliefs is
rather complex, there is no doubt that religion, even in secularized societ-
10
Monotheistic religions profess faith in a single God, understood as creator of the world and the
being that governs the destiny of individuals; polytheistic religions (all the ancient religions, and
many tribal and some eastern ones to this day), on the other hand, worship a number of divinities,
generally responsible for various activities or phenomena connected with the wellbeing of individu-
als. An intermediate conception is that of monolatry, in which a single god is worshiped without
denying the existence of other divinities.
ies, is a factor that strongly conditions the behaviour of individuals and

group dynamics, at least through the influence it has on upbringing and
on the institutions created in the different societies. In some societies,
religion and upbringing are completely blended, and it is hard to grasp
the boundaries between dogmas and social norms. This is, for example,
the case of Confucian philosophy, underlying many religions present in
the Asian area, which in some parts of China and Korea is recognized as
moral law, as a life philosophy that permeates society in its aspects of
education, behaviour, and evolution.
Although no cause-and-effect relationship between religious beliefs
and social phenomena is confirmed, some scholars have dwelt on the link
between religious precepts and teaching on the one hand, and cultural
values on the other. From this standpoint, religion would function as a
binder, amplifying the effect that fundamental assumptions, rooted in
societies through the role of institutions, have on values, and therefore on
the guidelines that inspire the behaviour of individuals and determine
their reactions to events and the behaviour of others. In this regard,
Rokeach (1973) stresses that religion emphasizes the importance of spe-
cific values, and it is with respect to values that any influence of religion
should be sought (Saroglou et al. 2004). On the other hand, it is precisely
the transmission of religious values and of the principles of moral phi-
losophies in families that represents the main mechanism for transmit-
ting values from generation to generation (James 1902).
The relationship between religion and culture was also examined in
greater depth by Schwartz and Huismans (1995), who verified the exis-
tence of a positive influence of beliefs underlying the leading monotheis-
tic religions (Judaism, Catholicism, Protestantism, and Orthodox
Christians) on individual values (universalism, benevolence, power,
result, conformism, tradition, security, self-focus, stimulus, and hedo-
nism). In particular, the following were identified: a significantly positive
correlation between religious beliefs and tradition and conformism; a
weaker yet positive correlation between religious beliefs and security and
benevolence; a negative correlation between religious beliefs and other
values (significant for hedonism and self-direction; a weakness for success
and power).
Continuing with Schwartz’s study, Saroglou et al. (2004) developed a

cross-cultural investigation focusing on the three main monotheistic reli-
gions: Judaism, Christianity, and Islam. They collected data from 15 dif-
ferent countries through the administration of questionnaires investigating
the impact of religiosity on the importance attributed to the various val-
ues. The authors in fact confirmed the main results Schwartz had arrived
at, finding that religious people are more inclined towards security, tradi-
tion, and conformism, and, to the contrary, are less inclined to value
openness to change and autonomy (Stimulation and Self-direction).
Moreover, according to their results, religiosity appears to favour values
that promote the transcendence of the self, but in a limited fashion: reli-
gious people are, in fact, inclined to benevolence, but not to universal-
ism. Moreover, they confirm the inverse relation between religiosity and
hedonism on the one hand, and religiosity and self-enhancement (power
and achievement) on the other, albeit with less intensity.
The understanding of religious practices and assumptions can foster
greater understanding of the behaviours and determinants underlying
them. This is true in the settings in which religion has a strong impact on
the social view—as takes place in most Islamic countries, but also in the
more secularized societies in which the roots that culture finds in religion
are handed down unconsciously by social upbringing and by the educa-
tional and legal system—as well on the concept of ethics and morality,
which in their evolution were at any rate strongly inspired or conditioned
by the religious currents prevailing in the specific setting. In this sense,
the interest that the greatest scholars of cross-cultural management have
shown with regard to the linkage between religious expressions and
dimensions identified in their own models appears justified (Hofstede
1980; House et al. 2002).
Going on to investigate the roots of the main differences between reli-
gions of the Book and Eastern religions, Gaarder et al. (1999) identify six
fundamental concepts that determine the cultural orientations in the dif-
ferent contexts: conception of history, concept of the divine, conception
of man, salvation, ethics, and worship.
With respect to the conception of history, in Western religions, a linear
conception prevails: history has a beginning and an end, and these
extremes coincide with the moments of creation and of the end of the
world. In Eastern religions, on the other hand, a cyclical conception of

history prevails, repeating in accordance with an eternal circle, from eter-
nity to eternity. Arrangements of the first type favour linear systems of
thought, and single-focus conceptions of time; they incline people to
investigate the cause of things and analyse the problems in a specialist
conception. The effects of these various arrangements on companies are
clear: in the former case, models of linear programming and medium/
long-term planning prevail; in the latter, the approach to decisions is
systemic, and the planning horizon is, by necessity, long term.
With respect to the concept of the divine, Western religions see God as
the creator of the world, unique, and omnipotent. To the contrary, in
Eastern religions, a pantheistic conception prevails, that sees the divine
everywhere and at any rate liable to take on a multitude of forms and
manifestations. The former approach fosters the sense of responsibility of
the individuals who must please their own God and set a sharp boundary
between what is good and what is evil; moreover, by using well-defined
conceptual categories, they tend more easily towards interpretations of
diversity based on categorization. On the contrary, the latter approach,
by exalting variety and interdependence, presses less towards categoriza-
tion, by not spurring the individual to please a higher being. On the
other hand, actions that deviate the order of things may be negatively
interpreted, and this leads to a preference for innovations in increments
and process, as opposed to discontinuous and product innovations. The
effects of this orientation on consumption are also considerable: in
Western settings, the average consumer is less attuned to the effects his or
her choices have on the surrounding environment, although, with eco-
nomic and cultural development, the concept of environmental respon-
sibility is taking root; in Eastern settings, however, some foods and
products might be avoided for the effects their consumption has on ani-
mals or more generally on the environment, and this requires careful
planning of communication campaigns.
The conception of man is also important: in Western religions, every-
thing is subordinated to God’s will, and this increases the rejection of
uncertainty and the tendency to be fatalists; humans are masters of their
own choices, but resort to a higher being to mitigate the effects of these
choices, or to resolve situations of discomfort. To the contrary, in Eastern
religions, the individual is not subordinated to God, but is part of every-

thing God represents. Man is at the centre of his destiny, or better, on his
own path of life and evolution. Intuition and thought are highly impor-
tant faculties of human beings, and are valued for the help they provide
in achieving inner peace. In Westerners’ eyes, the inclination to media-
tion leads to squandering time, and to a lesser result orientation. This is,
however, a partial vision of a practice that, for Easterners, leads to over-
coming sacrifice and to focusing on the goal. The ability to commit is not
different so much, rather, as time management during the phases of plan-
ning—which are generally longer in the East—and of action.
The fourth point is represented by the idea of salvation. In Western
religions, God is responsible for the salvation of individuals. Even where
individuals fail, God has the power to save them. On average, except for
the Protestant strains, Western religions are connected to a greater rejec-
tion of uncertainty, which scholars link to their vision of God. This entails
a lesser propensity for risk taking. On the other hand, even when there is
no refusal of risk or aversion to change, fatalism leads to a lesser orienta-
tion to the future. In Eastern religions, it is human beings, through their
intellectual capacities and their actions, who determine their own future.
There is no destiny understood in the Western sense as the preordained
path of life; individuals know they have to face uncertain and unknown
situations, and take action over time to improve their lot. Thus, persever-
ance becomes a trait typical of these religions and of the societies in which
they take root: in companies, a greater orientation to the long term is
observed, also in innovation which is assessed with regard to the possibil-
ity not so much of achieving short-term results, as of yielding effects that
are significant over time. Decision-making processes are also different—
more hasty in Western situations, and longer in Eastern ones: if the
temporal horizon is long for actions and innovation, it is also long for
relationships, and it is thus appropriate for all their aspects to be carefully
assessed. There is less of an inclination towards fatalism, which generally
corresponds to a greater inclination to face uncertainty and to make an
effort in view of future results.
Ethics is understood in Western religions as the set of behaviours that
regulate the individual’s relations with society. There is an emphasis on
the value of individual ethics, which must be as consistent as possible
with religious morality. Ethical behaviours are those that protect and
value the individual as a human being, and there is a strong consistency
between dignity and respect for individual identity. In Eastern religions,
on the other hand, a vision of the world as a unitary entity, as a set of fac-
tors independent of one another, prevails. Morality does not regard so
much the relations between the individual and the group, and the safe-
guarding of the individual, so much as, rather, the protection of the group
as an entity in which the individual grows and develops. The focus of
ethics, then, shifts from the individual to the collective, and any behav-
iour that protects the group, even to the detriment of the individual, is
accepted as consistent with morality. The individual sacrifices him or her-
self for the group, and at the same time draws the benefit of belonging to
a group. Actions and behaviour are not assessed individually, but in
accordance with a broad cycle that passes through various phases of life.
In this perspective, children sacrifice their own carefree lives and their
right to education in order support the group, through their own labour;
but they know that at an advanced age, in their own lives, they will enjoy
the assistance of those younger than them. In companies, it is customary
for employees to work more than the agreed-upon hours; employees sac-
rifice themselves for the company and in exchange receive the company’s
material and moral support.
Worship is also profoundly different: in Western religions, it is essen-
tially based on prayer and preaching, emphasizing paternalism and
authoritarianism as mechanisms of social regulation. These mechanisms
reinforce hierarchical distance—which, however, cannot be understood
as a trait typical of all Western religions—as well as the propensity for a
lesser emphasis on performance and the long term. It is the leader who
bears responsibility for subordinates. However, this cultural trait is not
typical of all Western cultures; to the contrary, the countries where
Calvinism and Protestantism are widespread are more inclined towards
making individuals accountable, and towards performance. In Eastern
religions, on the other hand, worship consists mainly of meditation and
sacrifice which, in many cases, are fused with the everyday.
The authors’ perspective is interesting, and drives towards an initial
reflection as to the macro-differences existing between the religions that
have the most influence on Western business culture and on those that
have greater impact on Eastern culture, which leads to reasoning on some

initial significant differences. This analysis perspective, however, appears
reductive in that it is incapable of grasping the influence of the religious
values of the southern hemisphere and, above all, of grasping the range
those religions have as a bridge between East and West. Moreover, the
various belief systems grouped into the two categories at times present so
many differences as to raise doubts about being able to include them in
so broad a category.
ational Culture and Business Culture:

N
A System of Interactions
It is the well-established opinion of leading scholars on the subject of
culture and international dialogue that business culture is to be inter-
preted as the result of an interactive process between organizational cul-
ture and national culture (Child 1981; Dorfman and Howell 1988;
Schneider and DeMeyer 1991; Trompenaars 1993), and that the align-
ment of business strategies, of structures, and of managerial practices
with the cultural variables of the outside environment lays the ground-
work for increased effectiveness in managerial action, and for higher-
performing results (Burns and Stalker 1961; Wilkins and Ouchi 1983;
Prescott 1986; Denison 1990; Kotter and Heskett 1992; Powell 1992;
Earley 1994; Newman and Nollen 1996).
On the other hand, if business is considered an open system, interact-
ing with the subjects and with the elements of the environment in which
it operates, it may naturally be thought that the culture of the individual
organization is highly influenced by the traditions, convictions, values,
attitudes, and norms of the community it is included in.
In the past, the interaction of outside (national) culture with the inter-
nal one (the organization’s) was often underestimated, and certain
authors, including Hickson (1974), maintained that industrial logic
could be affirmed with its own rules in any cultural setting, thus stabiliz-
ing the relationships between the structural characteristics of the organi-

zations and the variables of context.11
In other research, the link was considered only in a perspective of one-
way dependence and, during the 1980s, Hofstede (1980) found a pre-
dominance of national culture over that of the individual organizations,
in a sort of subordination and adaptation of specificities to beliefs and
values of a broader cultural sphere.
Subsequently, other authors, including Adler (1986), maintained that
national culture could rarely be glimpsed in companies, since the culture
of an organization, by moderating or cancelling the national one, made
all the actors in the same organization similar, even if they came from
different contexts. In this sense, the organizations’ culture implicitly pre-
dominates over the beliefs and values consolidated in the countries of
origin; emphasis is placed not so much on the culture of the contexts in
which companies operate, but on that of the nations of origin of the
members of the organization.
Only later theoretical and empirical research, supporting Hofstede’s
hypotheses and focusing attention on the players’ behaviour, also high-
lighted the role played by the cultural factors of the various settings the
organizations are included in. The underlying hypothesis of these studies
is that both the internal and external culture exert an independent influ-
ence on the behaviour of the members of an organization.
Drawing from this climate of interdependence, it appears appropriate,
then, to state that the company cannot be considered as a mere receiver
of outside stimuli, but as an actor that creates its own culture in symbiosis
with the environmental context, by interacting with it and contributing
to its formation and change (Calvelli 1990). If this approach is accepted,
the company is to be understood not only as a constituent element of the
environmental context but also as a factor determining the development
of a certain area or country.
In fact, in the hypothesis of the existence of a circular-type company/
environment link, only if the company is innovative and a bearer of new
11
Only later, the author’s position was less rigid, recognizing that the culture of contexts had a
capacity to influence over structures and over organizational processes (Lammers and Hickson
1979).
values is the groundwork laid to generate a self-propelling process of

development for the area in which it operates.
The interaction of these two cultures, one environmental and the other
belonging to the “dominant coalition” that takes shape in any company,
contributes towards outlining a given organization’s way of being or, in
other words, its culture. This means that except for cases in which the
business culture has specific features to distinguish it from the national
culture or from that of other sub-areas of the country, the analysis of
national culture (or the culture of local sub-areas), is fundamental,
because it acts upon business culture, influencing its management style
and, indirectly, its performance as well.
It is precisely the specific features of certain cultures of countries—or
of sub-areas of countries—that have at times determined organizations’
competitive advantage. This is in keeping with the concept of neo-localism
that Varaldo (1994) arrived at when emphasizing the role of intangible
resources, in exploiting the local dimension, as a source of competitive
advantage and, more generally, in terms of information and knowledge.
The nature of these resources is such that a company cannot appropriate
them by traditional means, but only through a process of interaction with
the environment that results in overcoming the perspective of depen-
dence, both of the company on the local environment, and vice versa.
onfrontation Between Business Culture

C
and Cultural Change
In inter-organizational relations, based on the possibility of the growth of
knowledge (scientific, technological, and market) of the individual part-
ners, an initial convergence of interests is not, in and of itself, sufficient
to guarantee the agreement’s success, since the key variable in forming
and maintaining a joint venture lies essentially in striking a balance
among the cultural incompatibilities of the companies placed in confron-
tation with one another.12
Well aware of this were the managers of some Italian companies that, in the 1990s, attempted to
12
make inroads into the Japanese market, learning at their own expense that success in these markets
In fact, every company tends to act by preserving its beliefs, values, and
organizational structure, designed consistently with its cultural compo-
nents; this means that, in international joint ventures, the clash between
different cultures often leads, as has been stated, to negative consequences
for the partners’ performance, for the working environment, for future
productivity, and for the players’ competitiveness (Beamish and Lane
1990; Meschi and Roger 1994). For some scholars, it is in fact far simpler
to overcome the cultural incompatibilities existing between different
nations than those due to the encounter between two organizations.
On the other hand, the reduction of the protectionist barriers, the
opening of new markets such as the Asian market, and the creation and
gradual extension of free-trade areas contribute towards outlining a new
competitive scenario for companies. No longer can they target the
national market alone, or place their faith in government protections;
they must increasingly orient themselves towards strategic and organiza-
tional solutions that permit gradual affirmation on external markets and
the raising of higher defences against foreign competition on the domes-
tic market. For this affirmation to take place, assistance is offered by
alliances among international companies. These alliances may reconcile
specialization and flexibility, and guarantee to the companies involved
access to new markets, the acquisition of new technologies, lower research
costs, and a greater capacity for innovation (Lorenzoni 1990).
Given, then, that forms of collaboration are a preferential road for the
development of business activities, the following question bears asking:
“what mechanisms are to be activated in order to try to smooth out the
differences hindering collaborations between culturally distant
companies?”
Paradoxically, if collaborations between companies are hindered by
cultural differences, at the same time, under certain conditions, they pro-
vide a sound thrust towards the cultural change of the partners in the
agreements.
is closely connected to the ability to penetrate into the complex corporate and national cultural
system. For example, it is typical of Japanese corporate culture to have a decision-making system
based on widespread responsibility, which determines the participation of an enormous number of
people in drafting a cooperation agreement; this considerably lengthens times in comparison with
a negotiation conducted with Western companies.
In this regard, many authors (Gagliardi 1995; Bollinger and Hofstede

1989) believe that a company’s culture may be modified only by way of a
cultural grafting from the outside. In this perspective, cooperation
between culturally different companies—as opposed to the assumption,
within the company, of bearers of different beliefs and values—can be an
effective solution to the problem of cultural change. This is because the
new managers can impose, brusquely and from information provided
earlier, their own beliefs and values, thus impeding that dialectical con-
frontation that can develop assimilation, learning, and sharing.13
In cooperative efforts among companies, however, provided there are
no positions of one partner being subjected to another, and no unilateral
opportunistic aims of quasi-colonization, the grafting of one culture onto
another may take place without traumatic clashes, especially if the play-
ers, encouraged by the same level of motivational investments, are able to
establish a constructive confrontation with one another. The dyadic rela-
tionship may lay the groundwork for a smoothing of cultural differences,
through understanding, imitation of successful behaviour, and mutual
respect for diversity.
Clearly, however, these changes cannot take place suddenly, but
require assimilation times. Cultural change is possible, not in a total and
abrupt way, but gradually and continuously, implemented through
cumulative, discontinuous changes in beliefs and values. The success of
cultural change therefore requires that the casting aside of knowledge
and the replacement of old assumptions with new ones—which for
some scholars (among others, Osland 1995) are the foundation for
change—not take place as an imposition (which is generally not
Case law opinions regarding cultural change are not uniform, and three major schools of thought
13
may be identified (Calvelli and Cannavale 2013):

–– the pragmatists, who maintain that the company, like any other social system and unlike bio-
logical units, cannot change spontaneously but requires a strong thrust towards change and a
leader capable of managing this change);
–– the purists (Smircich 1983; Hatch 1993), who, influenced by anthropological studies, do not
agree with the possibility of managing culture and believe that cultural change is possible only
following a vital need for self-learning and for differentiation, and that it can be implemented
through interpersonal relationships; and
–– the incrementalists (in the manner of Lakatos), according to whom a company’s primary strat-
egy is to preserve its identity, and this can be changed only in the event of a crisis of survival.
Therefore, change can never be revolutionary, but is incremental.
accepted, the more widespread and shared the culture is in the organiza-
tion) or as a revolution (often the cause of crises and of irreparable con-
flict). The change process must, in the manner of Lakatos (1993), be
incremental and gradual, aimed at creating acceptance of better knowl-
edge that makes a richer contribution than prior knowledge, thus safe-
guarding the specific cultural features that the new knowledge neither
refutes nor “belies.”14
Given this, the more dissimilar the partners’ cultural variables are, and
the more asymmetrical mutual knowledge is in the phase of initiating the
agreements, the greater is the time needed to assimilate differences, and
the higher are the obstacles to be overcome for active collaboration among
companies in different settings.
It may be thought that cultural differences are broad when consider-
ing, as terms of comparison, companies operating in countries with
advanced economies, in developing countries, and in European countries
that once had a planned economy.15 These are countries with a different
degree of economic development and a different distribution of means of
production: on the one hand, there are countries that were for years
marked by the absence of private entrepreneurialism; on the other, there
are countries with a market economy, of which competition and the
entrepreneurial spirit are a distinctive trait.
However, elements of diversity of a cultural type also exist if the con-
frontation exclusively affects companies operating in countries with an
advanced economy, and sometimes are evident enough to lead to difficul-
ties in establishing collaborative relationships, or to the failure of those in
existence.
14
In a certain way, this appeals to the concept of evolution of the culture by “successive hybridiza-
tions,” developed by Schein (1985), which Piantoni (1990) interpreted in the sense that, over time,
the culture of origin undergoes the addition of new elements that do not abruptly replace those
beliefs and those values which are now strongly rooted in a certain group.
15
Generalization by companies to the contexts in which they operate must be interpreted not in an
absolutist perspective, but in a perspective of the dominance of certain situations and, based on the
discussion on the previous pages, with a vision of the company as an “actor that creates its own
culture in symbiosis with the environmental context.”
ultural Characteristics in Certain “Culturally

C
Homogeneous” Contexts: Impact on Local
Entrepreneurial Systems
USA–Japan
The conflict between the objectives of individuals and the interests of the
groups with which the individual interacts is often at the centre of the
debate over the cultural differences of companies and of the contexts in
which they operate. The confrontation is often also synonymous with the
behavioural differences between American and Japanese companies.
Collectivist societies target their efforts towards preparing individuals
to accept the beliefs and values of the groups in which they operate, while
individualistic societies encourage targeting individual efforts towards
achieving one’s own specific interests (Wagner and Moch 1986), and this
can slow the growth of the economy and of a nation.16 In fact, the
significant negative relationship found by Hofstede (1980) between lev-
els of individualism and the rates of development of GDP led the author
to suggest that, in the countries with developed economies, individual-
ism is a factor impeding economic growth.
Later research found that economic development sees faster growth not
only where there are low levels of individualism, but also in the presence of a
high “long-term orientation”; this factor was dubbed “Confucian dynamism”
(Hofstede and Bond 1988; Hofstede 1991), in keeping with the future-ori-
ented principles that condition societies’ development trajectories, such as
perseverance, parsimony, a sense of modesty, and a scale of priorities of bonds.
The results of this research, however, have been the object of critical
debate in the economic literature, since they overemphasize the impact
of only two dimensions of culture17 (albeit a compound impact) on a
16
It also bears noting that the logic of maximum individual benefit identifies a business model that
often neglects the value of “human capital,” considered on a par with any production factor, and
therefore delegated to provide the maximum output at the lowest possible cost (Guatri and Vicari
1994).
17
Among other things, some research efforts have shown that the two dimensions used by Hofstede,
Franke, and Bond (individualism and long-term orientation) are negatively correlated with one
another (Yeh and Lawrence 1995).
c ountry’s economic development, neglecting the other potential condi-

tioning factors. However, they at least have the virtue of highlighting
that the study of a context’s culture must not be neglected in analyses
regarding the growth conditions of a nation and of the companies oper-
ating in it.
The cultural dimension of individualism/collectivism plays an impor-
tant role in the organizational problems of major multinationals that,
by necessity, must govern a variety of behaviours and cultures present
both in internal environments and in the external ones of associated
entities.
Major corporations not only have to manage the complexity of a
human capital that contains a more or less broad cultural diversity but
must also operate in contexts that may often be culturally distant. Central
managers must often seek to reach a sort of compromise between encour-
aging the individual freedoms of the peripheral managers and exalting
the collectivist spirit, thus incentivizing both the creativity of individuals
and the cooperation that creates learning synergies. In both cases, risks
are run that, in the case of a preference towards individualism, may lead
to opportunistic degenerations of local managers and to a general trend
for them not to collaborate with the other members of the organization;
in the case of a preference towards forms of collectivism, if these are not
spontaneous, but are imposed by the centre, they may lead to degenera-
tive forms of conformism, bureaucracy, rigid decision-making, and loss
of professionalism (Morris et al. 1994).
In inter-organizational relations, above all international ones, the pres-
ence of a strong individualist spirit, as often takes place on the domestic
market, should raise a barrier to the achievement of collaborative agree-
ments among companies. The individualist spirit should impede the
birth of forms of collaboration with foreign partners, while the collectiv-
ist spirit should, at least by its own nature, speed the process of creating
systems of collaboration. On the other hand, a more careful reading of
the obstacles standing in the way of international collaborations, along
with a study of concrete cases, leads to rejecting these assumptions nearly
altogether.
Generally, a company that opts for a collaborative relationship aims to
solve strategic problems that it cannot overcome with its own forces, and
seeks to achieve more efficiently or in a more limited time the pre-

established strategic goals.18 Achieving these results requires no small
amount of time, for that rapport of trust ensuring stability in the rela-
tionship and the achievement of synergies of results to be created among
the partners.
In a short-term perspective, only opportunistic and contingent pur-
poses are emphasized, and the advantages that are gained are generally
unilateral, favouring the actor that abandons the initiative when the
premises that were decisive when the agreement was made no longer
exist—essentially, when the partner acquires the knowledge it did not
possess; there may also be a phenomenon of cannibalism when the part-
ners, upon gaining possession of the knowledge they did not possess
earlier, become competitors of the partners whose knowledge they

assimilated.
Among the determinants contributing to the rise, in the English-
speaking world, of an individualist orientation, an essential role was
played by the Protestant ethic which, in the sphere of working relation-
ships, exalts the Judeo-Christian conception of the importance of the
single individual and of his/her value, and the separation between own-
ership and control that is characteristic of the large modern corpora-
tion.19 As regards this last point, the ownership/control split has multiple
causes, ranging from the inability of founding groups to guarantee all the
financial resources needed for the company’s development, to anti-
monopoly laws (United States and Great Britain) that boosted reliance
on the stock market.
The fragmentation of the shareholding structure, which does not
favour stable control, often leads to the rise of an opportunistic mentality
18
The benefits most frequently sought are sharing costs and investments, achieving the optimal size
for being competitive, acquiring skills not previously possessed, reducing risk, overcoming the bar-
riers to entering certain markets, limiting the freedom of action of current and potential competi-
tors, accessing critical resources, and completing one’s own offer (Hamel et al. 1989).
19
It bears noting that the phenomenon of the large modern corporation has different dimensions
depending on the context of reference. In Italy, for example, there are few companies with “effec-
tive” managerial control. Companies present only in formal terms a managerial structure to which
decision-making power is delegated, since, in concrete terms, it is often families that dominate the
organizational structure and influence, in a determinant way, the running of companies.
in company managers oriented towards contingent situations and short-

term results.
This behaviour, oriented towards legitimating one’s own position
rather than towards adopting decisions in the company’s long-term inter-
est, creates, in the first place, a sort of “tyranny of accountants,” by which
company managers operate on the basis of a deeply rooted conviction
that future results depend on short-term results (Abegglen and Stalk
1988). In the second place, the objectives of companies pursuing oppor-
tunistic purposes are generally set in such a way as to strengthen the
competitive advantages already acquired, and the managerial perspective
is not particularly aimed at developing learning processes allowing new
competitive advantages to be achieved (Hamel et al. 1989).
As regards the first point, it bears noting that the achievement of short-
term “concatenated” objectives is possible only if the environment is
mechanistic in type, which is to say governed by predictable laws of evo-
lution and by recurring phenomena. Only on these premises can the
manager suppose that short-term and low-risk investments can generate
the foundation for future investment with the same characteristics. In the
current economic phase, however, environments are evolving discontinu-
ously and turbulently, and this impedes the formation of a rational plan-
ning of the actions to be implemented.
As to the second point, the short-term orientation entails, on the one
hand, interpretative distortions in the forecasts of future results and, on
the other, the affirmation of an individualist spirit in business managers,
aimed at pursuing contingent objectives above all. The contingent per-
spective is by all means a factor hindering the maintenance of collabora-
tive relations with foreign partners, and thus contributes towards the
relationship’s early conclusion.
The culture of the English-speaking world is more oriented to the indi-
vidual than the group, and is highly ethnocentric. Companies are very
hierarchical, with exclusively top-down relations, and with a limited will-
ingness either to submit decision-making to the consensus of other par-
ties, or to implement manoeuvres of external growth, since they are more
oriented towards a “single-company and multi-divisional” type of organi-
zational structure. Often, major multinationals adopt the form of the
multi-company group not as a deliberate choice, but out of a need
induced by operating in different countries; in any event, multinationals

seek to obtain control of outside companies by acquiring majority capital
(Dematté 1996). The result is that the forms of partnership with a com-
pany in the English-speaking world may often be temporary, as they are
destined to transform following acquisitions.20
Working in the opposite direction is the Japanese company operating
in a setting that is both ethnically and religiously homogeneous, marked
by a collectivist culture, by a strong nationalist spirit, and by beliefs and
values of ancient feudal tradition. The company is understood as a
long-lasting community projected into the future, and not as a cash-flow
machine oriented to the short term.21
The particular structure of the Japanese company determines stability:
management, since it does not have to continuously legitimize its doings
by distributing high dividends, can adopt investment decisions oriented
to the long term and pursue objectives like growth and increasing market
share.
Japanese collectivism has its roots in the principles of Confucianism:
attention to the immanent rather than the transcendent; the achievement
of harmony (“mean”) between men and nature, to be attained in earthly
life; a vision of the individual as an active subject in earthly life; a focus
on the existing relationships among the members of one’s own group;
filial piety (taking care of one’s parents and ancestors); and reciprocity.
While the centrality of relationships is one of the bedrock principles of
Confucianism, hierarchy is equally important. In fact, Confucius identi-
fies five categories of hierarchical relationships upon which all society is
based—ruler/subject, father/son, husband/wife, elder brother/younger
20
Emblematic is the case of Pfizer, which in 1992 took over the joint venture established with
Japan’s Taito, as it had by then acquired sound knowledge of the Japanese pharmaceuticals
market.
21
The first distinctive characteristic of the Japanese company consists of assigning control power to
workers and banks, while individual investors are given lesser shareholding weight, since two-thirds
of the shares are held by financial institutions and by other companies (Guatri and Vicari 1994).
The bank is not a simple outside financer of the company but is linked to it by a long-lasting rela-
tionship based on mutual trust. On the opposite side, in countries in the English-speaking world,
banks play a marginal role, as there is widespread reliance on such alternative instruments as the
issuing of bonds, stock, and other securities. However, even in countries like Italy and France,
where bank debt is rather high, banks lack control power and, often, the only way they can sway
management choice is to revoke credit when the company is in difficulty.
brother, and elderly/young (Punk et al. 2001). These principles led to a

high degree of “power distance” in society and in companies.
Moreover, in Japan, Confucian culture gained strength by uniting
with Shintoism, and this union fostered the development of concepts like
group spirit and respect for authority, obedience to leaders, collectivism
widespread throughout the nation, collective concerted action, and reci-
procity to the point of its most obvious manifestation: lifetime
employment.
This union also led to the rise of forms of organization permeated by
the spirit of association, in which decisions represent a collective will and
relationships among the players privilege relational exchanges of
knowledge.
Japanese and American cultures present a clear dichotomy: one need
merely compare the emphasis on trust, typical in the Japanese world, and
the criterion of opportunism, which often underlies relationships in the
English-speaking world. For the Japanese, the positive outcome of a col-
laborative relationship depends on commitment, trust, the partners’ good
faith, and the mutual conviction that collaboration makes the players
stronger, since they possess complementary knowledge and skills (Ohmae
1990); on the other hand, for operators in the English-speaking world, it
is necessary to choose a compatible partner, with complementary prod-
ucts and markets, from which to learn as much as possible without hav-
ing to reveal one’s secrets.
The Japanese model is a sound basis for developing forms of col-
laboration, at least within domestic markets: the company is under-
stood as a community, it is permeated by group spirit, and any decision
is the result of collective concerted action; there are top-down rela-
tionships, but also bottom-up relationships, as well as sideways ones,
which involve informal interactions between decision centres operat-
ing at different hierarchical levels. The informality of internal rela-
tionships, extended also inside the company, can guarantee an
alliance’s success; many research works on the theme have in fact dem-
onstrated that the most advantageous components for the stability of
partnerships include, in fact, that of control exercised through infor-
mal and interpersonal bonds, rather than through formalized systems
(Kanter 1994).
For the exchange of knowledge within the company and among com-
panies, the Japanese have developed, within their domestic confines, a
particular relational capacity aimed at sensing the needs of individual
players inside and outside the company, and at developing a cumulative
process of growth of contextual and synergistic knowledge. Preference for
a type of cognitive process that emphasizes human problem-solving abili-
ties rather than impersonal, rational, and analytic factors creates a group
harmony and a trend to develop a system of friendly relationship among
individuals.
Greater opening to learning new knowledge creates, in Japanese com-
panies, a particular spirit of adaptation to new environmental situations
that may arise (Abramson et al. 1993).
The holistic conception of the market is particularly evident when ana-
lysing competition which, in Japan, does not take place among individual
companies but among groups,22 among keiretsu, which is to say clusters
The Japanese Market: Stable Relationships Based on Trust

Entering a network of established relationships is no easy task for
Italian companies, given the emphasis Japanese companies place on
stable relationships and mutual trust.
While having relations with Japanese companies is difficult, it is
also the case that once an agreement is reached and the operators are
in house, it is rare for the underlying contract to be cancelled or not
to be renewed over simple financial issues. Establishing collabora-
tive relationships with Japanese companies is rather hard, but once
they have been reached, the Japanese counterpart will seldom dis-
solve the contract or fail to renew it over a simple difference in price.
At the other extreme, price difference is the key variable on which
American companies (and Western ones more generally) evaluate
22
For example, between 1987 and 1991, Mips Computer System, a Silicon Valley company, devel-
oped a network of alliances to spread its technology into the field of microprocessors. It licensed
NEC, Siemens, Toshiba, and LSI Logic to make its chips, and this convinced DEC, Olivetti, Bull,
Nixdorf, and Silicon Graphic to use them. The spread of technology in turn fostered the creation
of business relationships with software makers and computer retailers. There are examples in other
sectors, too.
whether to start, continue, or interrupt a collaborative relationship.

Often, this variable prevails over other factors, such the product’s
quality and the partner’s reliability.
In the 1990s, in an agreement reached with a Japanese company
by an Italian footwear producer, economic and financial data were
overshadowed by personal relationships. Before the contract was
signed, numerous direct contacts were made with the foreign part-
ner, which attended Italian trade shows with a certain frequency,
while the Italian company systematically attended trade shows in
Tokyo and Osaka. The Italian company, to win its partner’s com-
plete trust, made exports without requiring an irrevocable and con-
firmed letter of credit on an Italian bank (the procedure normally
followed), but requesting direct payment and wire transfers (proce-
dures applied to relationships with customers of long standing and
proven reliability).
(Source: DSAQ Database)
of companies with a leader company at their centre, bound to one another

by intersecting ownership relationships. The culture within the Japanese
company, with its emphasis on cooperation, trust, and the relational per-
spective, can also be extended to relationships between Japanese opera-
tors and foreign players, provided that, as already stated, the foreign
partner can conquer the trust of local businesses.23
Also decisive to the creation of a relational system within the country
was the role of institutions: in Japan, MITI did not merely incentivize
23
In the past, Japan appeared closed to foreign investment, given its highly restrictive regulations
on foreign operators. During the period between 1952 and 1964, the flow of capital, technology,
and goods to Japan was subject to specific government authorizations, which governed above all the
procedures for repatriating capital and profits. However, no authorization was required for invest-
ments made in what were termed “yen companies”—companies established with converted foreign
capital, for which the repatriation of invested capital and profits was subordinated to the planned
convertibility of the yen (which took place in 1964), and, moreover, there were no constraints on
the percentage of shareholding possessed by the foreign operator. Investments made with specific
authorizations, on the other hand, were subject to the condition that the initiative to be developed
was in the national interest and that the foreign stake did not exceed 50% of the company’ share
capital.
companies and introduce and spread new technologies and new prod-
ucts, but it also promoted cooperation agreements both among domestic
companies, and between domestic companies and foreign ones.
Japan–China
As with Japan, Confucianism is the cultural template of China and of

many neighbouring areas where Chinese emigrants helped spread their
culture.
While in Japan, the membership group is the whole nation, in China,
the group is formed by all those who have joined the “extended family”
through relationships of guanxi.24
While in Japan, Confucianism was reinforced through union with
Shintoism, thereby impacting the culture of society and of local compa-
nies (obedience to leaders, collectivism widespread throughout the
nation, collective concerted action, and reciprocity to the point of its
most obvious manifestation: lifetime employment), in China
Confucianism, in most cases, united with Taoism (the religion of the
humble), in turn differentiating China’s culture from Japan’s.
Underlying Taoism is the concept of Tao,25 the absolute truth, which
embodies the continuous becoming and transforming of nature through
the ongoing dialogue of the two opposites (Yin and Yang) it is composed
of: there are no clear separations between good and evil, or between past,
present, and future.
However, unlike Confucianism, Taoism focuses on the individual
rather than on the group; it is in fact the individual who, through medita-
tion, the “inner silence and fasting of the mind,” can achieve absolute
24
Guanxi relationships are the most obvious manifestation of the Confucian principle that identi-
fies the individual as “self in relation to other.” Guanxi may be defined as a dyadic relationship
based upon the existence of specific interests and the obtaining of mutual benefits (Yang 1994). It
bears noting that guanxi has a transitive effect.
25
Taoism’s only divine figure with personal characteristics is Laozi, representing the body of Tao,
both male and female, who lives by successive transformations yet remains identical because his
forms, according to tradition, are phases in a self-perpetuating cycle. This means that China,
although showing a high level of masculinity, does not present discriminatory practices against the
female sex, and women can pursue careers and become top managers at major Chinese firms.
truth. Therefore, if Confucianism preaches man’s active participation in

society and controls nature for the purpose of re-establishing balance and
harmony, Taoism sees man as a passive spectator, and preaches the ability
to let oneself be transported by events (Hooker 2003). The union between
Confucianism and Taoism gave rise to:
–– that particular collectivism found in China—a “group” collectivism

(as defined in studies on the cultural dimensions of the Globe, reported
in Calvelli and Cannavale 2013) that involves renouncing one’s inter-
ests for the good of the group’s members, and, at the same time, a sort
of individualism with regard to members of other groups. At any rate,
the Chinese managerial system is based mostly on family enterprises
revolving around the figure of the head of the family, in which infor-
mation is spread in accordance with a top-down mechanism. In China,
there are no quality circles within large companies, just as there are no
networks of companies like the kereitsu;
–– a highly active attitude in economic life, because work and money can
allow the head of the family to guarantee the security of the members
of the extended family and to respect harmony, and a passive attitude
towards political life, in the choice of rulers; and
–– a large “power distance,” in society and companies, involving high
acceptance of protection exercised by the eldest members of the
“extended” family and by local politicians. Protection by political rul-
ers is to be understood not in the sense of guiding the companies’
development, but rather as a sort of paternalism, by which the unit of
reference of the Chinese individual has always been the family rather
than the State (Li and Karakowsky 2002). Therefore, risk aversion in
China is lower than in Japan, and the Chinese tend more to set up
their own businesses rather than to work in the employ of others. The
high power distance also involves a lack of flexible communication
between the different levels and, conversely, a highly hierarchical
communication.
The particular nature of Chinese culture also has a determinant influ-

ence on the inter-organizational relationships between Chinese and
Western companies (Parmentola 2010). As already stated, if the Chinese

show a collectivist spirit within their own family and clan, they prove to
be highly individualistic in their relations with parties outside this
restricted environment, and this is also the case for relations with foreign
companies.
Given this, relations with Chinese companies are difficult to initiate,
and are at the same time unstable. The difficulty in initiating relations lies
both in the difficulty of establishing contact with the Chinese partner
and in the complexity of the negotiating process.
As to the first point, in fact, it is known that entry into China cannot
take place without an intermediary bound by a relationship of guanxi
with the Chinese partner. In China, relationships are always between
people and never organizations, and are always informal in nature
(Parmentola 2013). This is also because China’s private law system exists
only in embryonic form, so contracts have little or no value.
In addition, the Chinese are quite skilled negotiators: in general,
they let the Western partner make the first move, and then start mak-
ing new offers and counteroffers on concrete terms. In many cases,
they can push the negotiation phase ad infinitum, until the counter-
part ends up yielding on issues that initially may have appeared non-
negotiable. Respect for hierarchy is essential for proper interaction
with the Chinese counterpart. The Western interlocutor should thus
avoid addressing the individual members of the group, and conduct
the negotiation by always addressing its most senior member, also
because only he or she can decide how to run the meeting and, where
necessary, whether and how to involve the others. Slow decision-mak-
ing, the result of rigorous respect for those who are older and wiser,
and of the obsessive fear of making a mistake, is the characteristic
element of the Chinese way of negotiating. However, the Western
interlocutor can rarely identify the key points and the priorities for
the Chinese—who consider the long-term implications of each
detail—and is often unable to guide the talks to his or her own
advantage.26
26
In the West, the level of generalization makes it possible, for example, to translate abstract prin-
ciples into business strategies, essential guidelines for specifying the details of the agreement.
The influence of Confucian ethics is at the origin of the Chinese expec-

tation of conducting all phases of the negotiation directly with Western
top management. However, Western companies often prefer to send, at
least to initial meetings, young managers without any real decision-
making power, in the illusion of “not wasting time.” This is a decision
incomprehensible to the Chinese, who interpret the absence of company
leaders as a clear sign of poor manners, and even of disinterest. The
Chinese require—often explicitly—that only the company’s top leader-
ship be involved in the negotiation (Weber 2005).
Negotiations are very long, and they reopen as soon as the first prob-
lem arises, as soon as the financial situation of the company and of the
environment outside the company changes. This is why it is important to
immediately establish common goals and to clarify how they are to be
achieved, without taking anything for granted.
Once the complex negotiation phase is completed and the agreement
has begun, the Western partner must continuously monitor the Chinese
partner’s behaviour. Unlike Japan, business relationships in China follow
a utilitarian logic; the foreign partner will never join the Chinese partner’s
restricted family clan, and the Chinese partner will have no problem—
should the opportunity arise—violating one or more clauses of the agree-
ment in order to obtain better results (Alston 1989). The Chinese partner,
after acquiring the necessary knowledge, tends often to dissolve the alli-
ance, or even to acquire the stake in the foreign company (Rui and Yip
2008; Wu 2005). Many Sino–foreign joint ventures established in the
Chinese context have ended with the Western partner’s exit. This is why
many foreign companies prefer to internationalize in China through the
establishment of the WFOE.
Korea: A Cultural Hybrid
As things currently stand, North and South Korea are culturally and eco-
nomically different realities. After the war, the country was divided along
the 38th parallel into two areas of Soviet (North Korea) and American
(South Korea) influence. The part under American influence, which
became the Republic of Korea or South Korea, was, under Japanese dom-
ination, the less advanced area of the country: industrialization had in

fact favoured the country’s northern portion, both for its strategic prox-
imity to China, and for its richer sources of energy and mineral deposits.
In Japan’s plans, the country’s south was to become the reservoir of agri-
cultural products for the motherland, and the site of light industry, in
particular the textile and food sectors (Molini and Rabellotti 2002).
After partition, South Korea, under the influence of American eco-
nomic principles, was marked by a development process that led to its
transition, over the course of a few decades, from a prevalently agricul-
tural economic system to a technologically advanced industrialized econ-
omy. To the contrary, North Korea, in keeping with the principles of the
planned economy that characterized the Soviet Union, despite faint signs
of development, followed a theory of self-reliance and progressively weak-
ened the national industrial fabric, depriving it of the exchanges needed
to sustain the development of businesses. In particular, the focus of state
investments in support of heavy industry also penalized the manufactur-
ing industry, leading to the emergence of large state enterprises that over
time became technologically obsolete.27
The cross-pollination between Japanese and American culture created
unique cultural dimensions in Korean society:
-The intermingling between American individualism and Japanese col-
lectivism led to a group collectivism that was binding only on family
members or on members of a chaebol. In Korea, the concept of group
took on a rather restricted meaning, limited to members of one’s own
family, to those originating from the same geographic region, or who
share the same academic background. Hiring privileges these relations as
well, especially for the creation of sharing and harmony within
organizations.
–– American influence also led to a high degree of orientation towards

results and performance, and to achieve them, the Korean works
“hard.” It is no accident that the working hours per person are among
27
In the aftermath of the Korean War, a great deal of financial aid arrived, not only from the USSR
and from the other countries governed by Communism but also from China itself, which commit-
ted mainly to cancelling the debts and to reconstructing the transport system. In the 1980s, the
dissolution of the Soviet bloc and the sharp decline in economic aid from it and from China further
undermined the country’s already fragile economic stability, leading it into a recessionary spiral.
the highest in OECD countries (45.9 hour per week in 2003) (Yang
2006). A Korean employed in one of the large enterprises competing
on the global market generally works upwards of ten hour a day, and
often, projects are in fact completed before the established deadlines
(Cho and Yoon 2001). This is one of the main stimuli spurring Koreans
to work to achieve success in their careers, and therefore justifies the
high level of assertiveness.
–– Japanese influence led the South Korean government to take on a
guiding role in developing the local business system. Out of all of East
Asia’s newly industrialized countries, South Korea was one of the most
interventionist: in planning, directing, and controlling companies and
financial institutions, it decided how to guide incentives to achieve
objectives of economic and social development. As with Japan, state
protection also led to a high degree of uncertainty avoidance in the
individual components of South Korean society, mitigated by the col-
lectivist orientation existing in groups. To minimize uncertain and
unexpected situations, Korean institutions tend to set very strict rules
and laws, seeking to control every aspect in the life of individuals and
companies; in Korea, no businessman can rise to the leadership of a
major company without support from the government or from some
political leader (Chang 1988). The financial system itself is strictly
controlled by the State, which also played an essential role in the devel-
opment of the large groups of companies, or chaebols.28 The
government launched the country’s economic development plans with
the identification of sectors strategic to the economy and gave chaebols
incentives to invest in these sectors. Companies were helped by tax
exemptions, easy access to imports, an export-friendly exchange rate,
and the defence of local products on the domestic market thanks to
customs policy (Rabellotti 1995). Moreover, the Korean government
allowed these companies to access foreign funds, guaranteeing loan
28
In Korean, the term “chaebol” means “financial group” and identifies both the group of compa-
nies controlled by a family, and its owner. In most cases, chaebols are themselves controlled by the
founders or the members of their family (brothers, sons, or daughters), who play key roles within
the organization and are little inclined to stock market listing (despite the companies’ large size) out
of fear of losing control over the companies (Chung et al. 1997). This characteristic represents one
of the essential differences from the large Japanese conglomerates, the keiretsu, which are to a great
degree run by professional managers.
payments in the event the companies were unable to make them.

Foreign investments thus financed a large portion of investment proj-
ects, particularly until the late 1990s (Hattori 1997)29;
–– The impact of Japanese culture also led to the search for harmony and
the creation of interpersonal relationship among the individuals in
society and in companies. The importance of interpersonal relation-
ships is emphasized by the concept of jeong, which is to say the emo-
tions and feelings (positive or negative) that bind individuals (Yang
2006). Korea was, in fact, the “society of jeong” or “the society of
human feeling,” bearing witness to the importance of the bonds of
emotion and empathy that are spontaneously created among different
parties that find themselves interacting with one another.30
The family capitalism of the South Korean chaebols, controlled in

most cases by the founders or their family members (brothers, sons, of
daughters), who have key roles within the organization, presents a strong
obstacle to creating international relationships with foreign companies.
In addition, chaebols are also little inclined to stock market listing
(despite the companies’ large size) out of fear of losing control over the
group’s companies (Profumo 2008).
29
Foreign financing was used, in particular, for the creation of the companies’ basic production
facilities: for example, the purchase of Boeing 747s by Korean Air Lines, the construction of a car
assembly plant for Hyundai Motors, and the building of a factory with Diesel systems by Daewoo
Heavy Industries, during a serious crisis in 1997. Starting from the financial crisis, the Korean
government sought to induce these conglomerates to focus on their core competencies, through
operations to purchase investee companies (carried out, in particular, via the chaebols); it improved
accounting standards and sought to take power away from the families that owned these conglom-
erates. The reform was hoped for by a number of parties, including public opinion, which was
concerned over the strong gap between the owning families’ wealth and power, and the rest of the
country. One need only consider that in the late 1990s a mere ten families controlled one-third of
the Korean productive system (Claessens et al. 2000)
30
Creating jeong is essential when wishing to establish commercial relationships with Koreans. The
government itself, through the Korean Business Information Services (KBIS), encourages foreign-
ers to organize after-work meetings with their interlocutors, or to attend personal events like wed-
dings and funerals, to show empathy and support, in order to establish personal relations with
Koreans, which are necessary for building long-term economic relationships (Yang 2006). No one
should sign a contract with a Korean partner unless they are willing to maintain a relationship—
and even a personal relationship—for the entire duration of the contract and beyond (Alston
1989).
Founding partners of chaebols have traditionally held direct control

over the entire group of companies, with a portfolio containing majority
stakes in the controlled companies (greater than fifty plus 1% of the share
capital). Over time, these parties have reduced their direct stakes in favour
of a system of “interlocking ownership” of stakes among the controlled
companies, but this has not undermined these groups’ governance struc-
tures, which are still strongly controlled by the founding family (Chung
et al. 1997; Kim 2003). Minority investors, then, cannot have any type
of influence over the governance of the chaebols. Moreover, the shares
held by foreign parties—whose stakeholding in the capital of Korean
companies was forbidden until 1992—are particularly small.
In organizational terms, the strong role of the family system in the
chaebols translates into the strong power and undisputed leadership of
the founding partners, who influence the running of the companies but
above all their corporate culture.
Moreover, chaebols have a high orientation towards technological
innovation.
Korea long neglected investment in research and development
(Sakakibara and Cho 2002). For many years, Korean companies mostly
adapted foreign technology imported through the turn-key acquisition of
plant, the purchase of machinery, the use of foreign consultants, and the
sending of Koreans technician abroad.31 Only in the 1990s, through the
chaebols, did R&D investment become considerable and comparable
with that of the leading industrialized nations.
In fact, over the years, the chaebols diversified the sources of techno-
logical acquisition in the following ways:
–– By investing directly in their own research institutes

–– By creating research centres abroad
–– By reaching cooperation agreements with the leading Japanese,
American, and, most recently, European multinationals
31
In the late 1970s, when Samsung decided to go into electronics, it had its technicians “dismantle”
colour televisions from the United States, Japan, and Europe, with the aim of understanding how
they were made, and then copying them (“reverse engineering”); Samsung thus took no less than
three years to enter the electronics sector.
As to the first point, mention is to be made of the Samsung Advanced

Institute of Technology (SAIT), one of Korea’s leading private research
centres. Inaugurated in the late 1980s, it brings together about 1000
researchers, many of whom recruited from among Koreans trained at
universities abroad.
On the other hand, as regards the creation of research centres abroad,
the entrepreneurs of the leading chaebols have introduced their own
researchers, with in-depth work and study experience in the United
States, into such high-tech areas as Silicon Valley, for example.
Lastly, a third way followed by the chaebols to acquire technologies has
been that of reaching collaboration agreements with some of the world’s
leading companies, above all from Japan (e.g. Nissan, NEC, and Fujitsu),
the United States (General Motors. AT&T, IBM, Compuserve, etc.),
and, albeit to a lesser degree, Europe (Mercedes Benz, ABB, Ericsson,
Alenia).
In this framework of technological cooperation, the Korean partner,
initially weaker as regards basic technology, was able to make a significant
contribution in terms of process and product technology.
With the success achieved in recent years in certain high-tech sectors
(semiconductors, telecommunications, robotics, computers, and the
aerospace industry), chaebols have proved to have acquired the techno-
logical capacity needed to face world-level competition. They have
followed a process of technological development characteristic of “later-
comer” firms (the “catching up” process): from imitation to adaptation,
to endogenous innovation, and lastly to overtaking technology leaders on
the technological frontier.
A useful indicator of the improvement and intensification of R&D
activities is the increased number of patents: as the above shows, Korea,
as early as the late 1990s, became the world’s number-five country in
terms of number of patents registered, after Japan, the United States,
China, and Germany (Kim 2000).
Given this information, it is clear that collaboration between Western
companies and South Korean companies is realistically possible only for
those high-tech companies that can operate in synergy with South Korean
ones and offer, to the network of relationships, contributions with a high
knowledge content.
As to entry via commerce, mention is to be made of the EU-South

Korea Free Trade Agreement—the first commercial agreement with an
Asian nation. The agreement eliminates customs duties for industrial and
agricultural goods, with a progressive and reciprocal approach.
The EU-South Korea Free Trade Agreement

The EU-South Korea Free Trade Agreement entered force on 01
July 2011, and is the first completed agreement of the new genera-
tion of Free Trade Agreements launched by the EU in 2007. The
agreement excludes only a limited number of products from the
elimination of tariff barriers.
The presence of an “origin protocol” serves to determine the
notion of original products to which the duty reductions established
by the agreement can be applied. Under the Agreement, goods of
preferential EU origin will benefit from reduced duties when
importing into the Republic of Korea and, conversely, goods of
South Korean origin will benefit from lower tariffs when exporting
to an EU country. Moreover, by the end of 2016, duties (which cur-
rently average 11.2% in Korea and 5.6% in the EU) will be abol-
ished for approximately 97% of products. The certification of the
goods’ preferential origin must take place as follows: for shipments
amounting to under €6000, the invoice will have to declare the
preferential origin in accordance with the text indicated by the
agreement; for shipments of a greater amount, a customs authoriza-
tion conferring the status of “exporter authorized to make declara-
tions of preferential origin on the invoice” will be required.
India
India is a composite of various and multiple cultural influences, the expres-

sion of a great many colonizing peoples. In fact, its variety of cultures,
religions, ethnicities, and languages is rivalled by few other countries in the
world. Many ethnic groups co-exist within India, including Indo-Aryans
(72%), Dravidians (25%), and Mongols (3%). More than 1600 languages
and dialects are spoken in India, and many religions are practised. Indian
culture is therefore permeated and shaped by the co-existence—peaceful
and otherwise—of many other cultures (Sorrentini 2009).
Hinduism, the prevailing religion, unlike other religions, has no
founder. More than a single religion, it is a set of different religious move-
ments sharing certain fundamental principles.
The first of these regards the cycle of rebirth (samsara): upon dying,
every creature is reborn in another body—plant, animal, or human. The
passage of existences, or the succession of rebirths that is broken when the
Indian discovers the final nature of reality,32 is seen as a drama from which
one wishes to free oneself with the aid of certain techniques, like yoga and
meditation.
The second principle leads Indians to follow (Sinha and Kumar 2004)
a non-sequential logic in which actions are judged for what they are
intrinsically, rather than for their outcomes. In this perspective, “The
present should not be regarded as a means to future satisfaction, but as a
satisfaction on its own” (Lannoy 1971). Therefore, in social life and at
work, the Indian focuses on the process and not the outcome, and this
may cause anxiety and distract individuals from complete concentration
on performance (Pande and Naidu 1992).
The third principle takes shape in the search for the final reality which,
in the Hindu view, cannot be understood through rational means, and
has neither shape nor name. This way of thinking encourages individuals
to seek an unattainable ideal, leading them to fantasize while not realizing
these fantasies in concrete terms.
Essentially, India still has a caste system, although it has been abolished
by the constitution. The caste system may be defined as a system that
divides society into a large number of hereditary groups that are distinct
and linked by three traits (Bougle 1927): separation in the matter of mar-
riage and of direct and indirect contact; division of labour, and hierarchy,
which orders groups into superior and inferior.
32
In many aspects, the nature of the ultimate reality is the bedrock principle of Hinduism. Hindus
believe in an ultimate transcendental reality that they aim to reach, and that goes beyond reason.
Indian society is traditionally organized in four varnas33 or classes (lit-

erally “colours”) that, in descending hierarchical order, are Brahmins
(priests), Kshatriyas (kings and warriors), Vaishyas (merchants), and
Shudras (labourers). At the bottom are the so-called Harijans
(untouchables),34 the rejected at the margins of society.35
However, over the last century, industrialization has brought changes
to the traditional caste system. Thanks to this, employment may be dif-
ferent from what the caste would impose, especially for such “new jobs”
as programmer, pilot, airplane personnel, and so on (Dumont 1966).
Generally speaking, companies have opened their doors to all castes
that are ready to take advantage of the opportunities offered by a new
type of work. The lower castes, especially the Harijans, find it convenient
to work in industry in order to attain a higher social status.
India, like Japan and other nations in the Far East, has a collectivist
culture, but British domination created cultural contaminations, as a
result of which the original collectivist orientation was mitigated by the
individualism characteristic of the English-speaking world; India thus
presents a high propensity towards “in-group” collectivism. The group
takes concrete shape in the “extended family” (referred to as the “Indian
joint family”), which is much larger than Western-type families; often,
the family is also the centre of economic activity, possessing and manag-
ing companies.
“In-groups” may vary in size, from the family alone, to friends, to the
company for which one works. Collectivism is strong within groups but
weak between groups.
Unlike Japanese collectivism, Indian collectivism is combined with a
large dose of spiritualism that is expressed by a complex set of beliefs in
gods and goddesses, religious rituals, morality, and benevolence, with
influences on the Indian psyche that are clear and run deep (Roland 1988).
33
The term “varna” is not a synonym for “caste,” although in the West, there is certainly some
confusion over this. The two concepts are to be maintained separate; in fact, there is no Brahmin
caste, but a multitude of castes within the “category” of the Brahmins.
34
Harijan literally means “children of God.” This term was introduced by Gandhi to designate
pariahs or Dalits, which is to say all those who were considered untouchable.
35
Power, in fact, belongs to the warrior varna and not to the Brahmins, who are at the top of the
hierarchy in terms of purity, but can in no case take power (in the political and economic sense).
Entrepreneurial activities are seen, in fact, as a privilege belonging to the varna of the Vaishyas
(merchants) and chiefly to certain castes in that category.
The superior offers affection, education, and blessing, which subordi-

nates reciprocate with loyalty, submission, and obedience. There is no
resistance or conflict. The less powerful seek guidance from those who
lead them, and the more powerful respond by defining the rules of the
game (Sorrentini 2009). A typical manifestation of this subordination to
the leader is the great power distance characterizing the Indian setting,
which is clearly seen in Indian family-run SMEs.
SMEs are led by the founder patriarch (Dutta 1997), a charismatic
leader with strong authority and power, or by the successor patriarch,
generally the eldest son, who should have more experience and leadership
ability. Should the eldest son not possess these abilities, the company may
be guided by other members of the “extended” family who possess clear
and marked management abilities, but the eldest son often retains presi-
dency in name, if not in action.
However, large companies are trying to assimilate the management
practices and governance systems of Western organizations: Indian insti-
tutions and universities have formulated management courses to meet
the demand for qualified management personnel.
The success of these initiatives is found, for example, in Bangalore, a
kind of Indian Silicon Valley, where Western-educated Indian managers
are able to run and administer the Indian industrial structure following
Western principles.
In general, Indian companies, and especially family-run ones, seek col-
laborations with foreign companies for three main reasons: technology
transfer; the use of foreign brands popular on the Indian market; and the
need to fund large-scale projects like infrastructure, for example.
The simplest way to introduce a foreign technology or product onto
the Indian market is to sign a licensing agreement with an Indian com-
pany acting as intermediary.
Indian companies prefer the foreign partner to hold a stake in the
company’s capital, even in sectors in which there does not appear to be an
overriding need to obtain financial resources: the foreign company’s par-
ticipation in the capital is held to bear witness to its greater interest in the
success of the initiatives that are undertaken (Dutta 1997).
A danger in the joint ventures with a strong involvement of family
companies is that its operation is slower. This is due to the fact that the
managers’ power is quite limited, since they must continuously ascertain

what the family thinks, in addition to the foreign company. The compa-
ny’s everyday management is therefore left to a family member, typically
the patriarch or an elderly member. Professional executives, in fact, have
the technical skills to run the company, but are often ill at ease in rela-
tions with the family (Parikh 2001).
Therefore, almost all foreign companies operating in the country have
begun to operate through joint ventures or other types of strategic alli-
ances, and only once knowledge suited to the market has been acquired
have they begun to directly control the local companies, in order to avoid
problems derived from joint ventures with Indian families.
Indian companies have had strong exposure to Western models, and
can therefore understand their partners better than takes place in other
Asian cultures. For their part, Western companies are not as used to
Indian models, or to India’s market, its rules, and its legal model.
Moreover, Western companies rarely know their partner well, also due to
the families’ lack of transparency. Consequently, they are unable to
understand the reasons why a joint venture can be very slow.
As for initiatives undertaken by Indian companies on foreign markets,
the values associated with the traditional entrepreneurial Indian family
are also present in Indian families living broad. The success of Ispat and
the Mittal family (owners of many steelworks worldwide) and of other
families, similar to the success of certain communities like the Patels in
the United States (the Patel community owns 40% of American motels),
may be taken as an example of the success that has been achieved. The
ability to operate successfully on an international level has also been
informally recognized by some British banks, like Lloyds and Midland,
which offer loans to Indian businesses based on guarantees offered by the
community, as recognition of the power of the viridari (family
networks).
An industrialized and technologically advanced Indian area is
Bangalore, which, especially in ICT, welcomes companies from the
United States, Europe, Japan, and, in recent years, from China as well.
The market structure presents small- and medium-sized enterprises led
by engineer/managers, who through spin-off processes—after some expe-
riences in large companies, and knowledge accumulated at universities
and especially those in the English-speaking world—have decided to cre-

ate their own business structures, driven by the passion for design and by
an orientation towards professional growth. The presence of skills con-
centrated in a given area has brought a propulsive effect of progressive
specialization, as well as spillover effects related to the spread of techno-
logical knowledge. In the late 1990s, in addition to the expansion of
American companies in Bangalore, local software companies managed to
break into the world markets by taking advantage of the prices offered for
these services by companies in Silicon Valley.
The Indian government also made a positive contribution to Bangalore’s
development. Local authorities, firmly believing in the sector’s develop-
ment potential and in the possibility for SMEs to create positive exter-
nalities and benefits for the whole country, have sought to facilitate the
development of local companies through the birth of real services in sup-
port of businesses: the creation of institutes aimed at training young peo-
ple with modern education suited to the market’s demands; financial
support through tax breaks for smaller companies; and the supply of con-
sulting for the marketing of IT instruments.
The Many-Cultured Europe
To study the culture of European contexts, the area must be segmented

into individual countries and, often, into sub-areas. In Italy’s case, the
chief obstacle to collaborative relations with partners—not only interna-
tional, but in the domestic setting as well—is the owner/entrepreneur’s
unwillingness to renounce decision-making power or to delegate author-
ity and functions, thus going against the principles at the very basis of an
inter-company alliance that, as is known, always involves partial losses of
control over one’s business.
The short-term perspective, the sometimes conflicting presence of dif-
ferent cultural groups, an emphasis on individualism, and an atomistic
vision of the systems characterizing the small- and medium-sized enter-
prises of certain Italian sub-areas (Calvelli 1990) lead to the belief that
these settings cannot be fertile terrain for developing an entrepreneurial
mentality aimed at voluntarily adopting cultural diversities. It may also
be thought that a change in behaviour and beliefs might be achievable

when players in the context, or cultural grafts from the outside, are able
to coordinate diversities and elaborate convergences of goals towards
developing initiatives on the one hand, while on the other hand showing
companies the usefulness of the initiatives to be undertaken, in terms of
economic returns and improved competitive advantages.
Conversely, German companies, which have created a capitalist model
similar to the Japanese, defined by Albert (1993) as “Rhine capitalism,”
show cultural behaviour closer to the Japanese world,36 especially in the
relationships established between companies and the domestic market.
As to the parameters determining collaborative choices with international
partners, German companies differ partially from Japanese ones, since
the company/market relationship is influenced by the orientation of both
supply and demand towards the product’s technical quality.
Orientation towards the product’s technical quality—which, when
spread to society as a whole, is an aggregating variable that reinforces the
spirit of belonging to the group—has for some time been the factor that,
more than others, has been the mark of German companies. An orienta-
tion of this kind is fostered by the sophistication of domestic demand
which, upon coming into contact with a supply that is, per se, oriented
towards the product’s technical quality, ends up generating a circular rela-
tionship resulting in the progressive increase of the technical content of
the products that are made.
In Germany, innovative development is strongly supported not only
by an efficient school system but also by the presence of concrete struc-
tures spurring innovation and R&D, such as the regional technological
agencies coordinated by Karlsruhe’s Fraunhofer Institute; these are tasked
with offering new businesses broad scientific and technical consulting,
and a series of financial facilities for innovative research (subsidies for
R&D personnel, industrial research associations, and consulting
services).
36
For Albert, the Rhine model, unlike the American one, has no “golden boys” or alluring specula-
tion; capitalism is in the hands of the banks, and there is no playing in the trading pit. Essentially,
banks have the role that is played by the financial market and the stock exchange in the English-
speaking world.
German companies’ orientation towards technical quality, like the

trust that is characteristic of Japanese companies, appears to be a factor
that can actually hinder the growth of collaborative relationships37 with
companies from culturally distant countries. Here, once again, the cul-
ture of a given setting plays a clear role, when that culture is considered
in its interactive relationship with other determinants of a country’s eco-
nomic development. Culture, although transforming itself under the
impact of technological innovation, can in turn orient, select, model, and
promote the creation, spread, and development of technological applica-
tions. On the other hand, since a nation’s culture is to be understood as
the product of the cultures of the organizations included in it, the exis-
tence may be thought to exist of a technological paradigm in which the
technical dimension takes shape with the combined contribution of eco-
nomic, institutional, and cultural factors. If this paradigm is accepted,
one may agree with the thesis that Fordist enterprise has entered into a
crisis because the various prerequisites—not so much technological but
above all economic, social, and cultural—upon which its effectiveness
was based no longer exist (Reyneri 1988).
The cultural variable is not extraneous to the processes of innovation
and the spread of technology, and this is also made clear when analysing
Japanese technological success. Japan is a very small country, poor in
natural resources, and highly dependent on an outside supply of raw
materials. Structural explanations alone appear insufficient for under-
standing Japan’s economic development, while interpretations emphasiz-
ing the cultural templates of Japanese society itself appear more sound
(Sako and Dore 1988).
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Index1
A 86n1, 95, 104, 115, 129–131,

Acquisition, 9, 10, 14–16, 28–30, 137, 171, 176, 186, 188
32, 41, 69, 70, 72, 84, 85, Assumption, 6, 40, 61, 172, 178n5,
87–89, 91, 92, 94, 105, 133, 179–186, 190, 193
168, 170, 189, 196, 207
Agreement, 16, 30, 54, 56, 57, 71,
82, 88, 90, 96–101, 118, B
121, 136, 146, 149, 150, Back-reshoring, 121–127
152, 169n2, 188, 189, Basic assumption, 175, 181
189n12, 191, 193, 194, Benefit, 7, 19, 37, 40, 44, 55, 59, 61,
198–200, 202n26, 203, 65, 72, 84, 85, 89, 90, 93, 94,
207–209, 212 96, 101, 111–113, 115, 118,
Alliance, 10, 49n9, 54, 56, 71, 73, 120, 121n4, 131, 133, 138, 142,
95–97, 105, 169n1, 170, 171, 147, 156–159, 185, 192n16,
189, 197, 198n22, 203, 214 194n18, 200n24, 209, 214
Allowances, 121 Born global, 5, 5n2
Analysis, 17, 19, 28, 42, 56, 61–65, Business culture, 78, 185–191
69, 70, 73, 75, 76, 79, 82, buyback, 97, 99
1
Note: Page numbers followed by ‘n’ refer to notes.

https://doi.org/10.1007/978-3-319-91551-7
228 Index
C Cooperative mode, 95–97, 105

Call, 16, 45, 46, 79, 86, 121n4, 137, Core factor, 28–39, 112
148n2, 153–156, 161, 175 Counterparty risk, 65, 140–143,
Captive offshoring, 120 148, 160
China, 8, 9, 11, 15, 17, 18, 20, 34, Counter-purchase, 97, 100
37, 38, 42–44, 79–82, 87, 88, Countertrade, 97–101
91, 122, 124–127, 178, 179, Countervalue, 100, 144, 153, 156,
179n8, 179n9, 181, 200–204, 158
204n27, 208, 213 Country of origin image, 15, 44,
Choice, 4, 5, 5n2, 7, 10, 11, 13, 18, 49n9, 119, 122, 124, 125
20, 25, 27–29, 27n1, 31, 33, 36, Country risk, 64, 65, 130, 131, 134,
39, 49, 50, 55, 56, 59, 60, 62, 141, 146–151
65–67, 69–75, 77, 83, 85–88, Cross-border, 63, 104
93, 96, 102–105, 111–120, 129, Cross-cultural management, 168
131, 134, 136–138, 142, 143, Cultural adaptation, 166
145, 151, 152, 183, 195, Cultural change, 188–191
196n21, 201, 215 Cultural distance, 168, 169, 175
Clearing Agreement, 100 Cultural knowledge, 166
Closely connected system, 51, 53 Culture, 47, 49, 54–56, 66, 69,
Commitment, 100, 103–105, 78–80, 85, 86, 97, 104,
120n3, 149, 153, 157, 173, 165–216
197 Currency future, 151–155
Compensation, 97, 99, 100, 138 Currency option, 151, 155–157
Competence, 15, 95, 117, 129, Currency risk, 143–145
165–179 Currency swap, 151, 157–159
Competitive, 5, 9–14, 16, 18, 19,
25–27, 27n1, 29, 32–35, 41,
44, 45, 48, 49, 54, 55, 61, 63, D
66, 67, 70–82, 84, 86, 89, 90, Default Risk Swap, 149
95, 96, 105, 112, 113, 115, Derivative, 135, 141, 147–149,
116, 131–133, 136, 139, 151–152, 160
144–146, 167–169, 169n1, Determinant, 1–20, 60, 61, 83, 92,
188, 189, 195, 215 113–117, 131, 142, 143, 176,
Contractual agreement, 97, 100, 182, 194, 194n19, 201, 216
146, 150 Disconnected system, 51, 54
Cooperation, 71, 73, 95–97, 101, Disconnection, 51–57, 175
104, 170, 171, 189n12, 190, Disintegration, 112
193, 199, 200, 207, 208 Diversification, 2, 33–37, 39–45, 82,
Cooperative, 7, 71, 190 111, 122, 142
Index 229
Dog, 3 Foreign direct investment (FDI),

Downsizing, 36–38, 112, 116 3–8, 10, 27n1, 59, 60, 64, 67,
Dumb-sizing, 116 82–95, 102, 105
Forward exchange, 154, 156
Future, 14, 39, 67, 114, 115, 126,
E 134, 137, 148n2, 151–155,
Eclectic theory, 9–11, 88 160–162, 184, 189, 195, 196,
Emerging economies, 18 200, 210
Europe, 16, 17, 30, 34, 38, 44, 55,
56n12, 63, 68, 79, 87, 88, 91,
92, 98, 122, 124, 126, 136, G
147, 160, 179n9, 207n31, Globalization, 45, 47, 49, 78, 84,
208, 213–216 85, 112, 132, 133, 142, 165,
Exchange, 10, 16, 35, 40, 43, 99, 166, 171
100, 112, 132, 133, 135, 138, Global strategy, 45, 46, 48–50
141, 143–145, 147, 149–152,
155–158, 179n8, 185, 197,
198, 204, 215n36 H
Exchange rate, 2, 44, 65, 131, 132, Hedging, 132, 134, 137, 141–143,
134, 135, 141, 143–145, 147, 145, 146, 151–152, 158–162
152, 178n6, 205
Expansion, 1, 28, 29, 33, 34, 42, 82,
84, 86, 88, 95, 98, 111, 121, I
214 Identity, 11, 46, 49n9, 79, 169, 176,
Expatriate, 166, 171 178, 180, 185, 190n13
Export, 2, 4–6, 5n2, 27n1, 46, 63–66, Import, 44, 73–82, 140, 178n6, 205
73–82, 88, 91, 92, 96, 98–101, India, 8, 17, 34, 44, 87, 125, 126,
105, 131, 147, 199, 209 178, 179n8, 179n9, 209–214
External analysis, 59, 102 Insourcing, 112, 114, 114n2, 116,
External development, 70 120
External factors, 59, 60 Institutional context, 70, 102–105,
129
Intercultural communication, 168
F Interest, 25, 56, 61, 62, 64, 74–76,
Financial instrument, 131, 135, 130, 134, 135, 141, 143, 147,
146–148, 160, 161 151, 151n3, 154, 157–159,
Financialization, 131–134, 140 162, 173, 182, 188, 192, 195,
Financial risk, 3, 65, 131, 134, 135, 199n23, 200n24, 201, 212
140–143, 145 Internal analysis, 59
230 Index
Internal development, 70, 72, 84 L

Internal factor, 59, 60, 102 Learning, 8, 8n5, 9, 11, 32, 34, 35,
Internalization costs, 7 42, 54, 55, 61, 62, 66, 75, 76,
International diversification, 34–37, 78, 81, 84, 87, 89, 95, 105,
39, 42–45, 148 112, 114n2, 134, 137, 140,
International expansion, 2, 33, 35, 166, 168–171, 175, 188n12,
61–70, 86–90 190, 193, 195, 197, 198
International leadership, 16–18 Long, 2, 4, 12, 20, 36, 41, 49, 53,
International process, 1–9, 11, 12, 92, 94, 105, 116, 127,
19, 65, 86, 95, 96, 103, 105 152–155, 173, 174, 179,
International strategy, 25–57, 170 183, 184, 192, 195, 196,
196n21, 199, 202, 203,
206n30, 207
J
Japan, 3, 8, 47, 88, 192–205,
196n20, 199n23, 207n31, M
208, 211, 213, 216 Made-in, 125–127
Joint venture, 17, 30, 57, 91, 95, Market analysis, 61, 62, 79
105, 118, 121, 126, 170, 188, Market commitment, 102–105
189, 196n20, 203, 212, 213 Mergers and acquisitions (M&A),
16, 41, 72
Mode, 5, 6, 27, 27n1, 27n2, 33, 44,
K 46, 48, 51, 55, 60, 61, 65–68,
Knowledge, 2, 3, 8–15, 8n5, 14n7, 70–82, 85–87, 91, 95–97, 99,
19, 26–29, 33, 35, 38–41, 101, 102, 105, 113, 129, 136
39n5, 40n6, 44, 46, 49, 51,
52, 55, 57, 60, 62, 69–73,
76, 77, 82–84, 89–91, 94, O
95, 97, 99, 103–105, 111, Offshore/offshoring, 18, 20, 33n3,
112, 116, 117, 121, 129, 39, 43, 84, 85, 89, 116, 120,
132, 145, 166–171, 169n1, 125, 126
169n2, 188, 190, 191, 194, Operational risks, 118, 121
196n20, 197, 198, 203, 208, Option, 39, 60, 61, 70, 114, 132,
213, 214 151, 155–157, 160, 161
Knowledge exploration, 14–16 Outsourcing, 16, 33, 44, 56, 79, 82,
Knowledge management, 166 102, 111–127
Korea, 8, 9, 88, 177, 177n4, 178n5, Outsourcing choices, 113–117
181, 203–216 Outsourcing risks, 119
Index 231
P 102–105, 112–114, 116, 120,

Partial compensation, 100 129, 130, 132, 152, 165,
Planning, 30, 52, 61, 63, 68, 69, 75, 169–171, 169n1, 169n2, 188,
76, 92, 115, 118, 125, 129, 194, 194n18, 212, 216
133, 162, 168, 172, 173, 175, Resource-based view (RBV), 12,
179, 183, 184, 191, 195, 12n6, 26, 167, 169n1
199n23, 204, 205 Resource seeking, 9, 19, 20
Portfolio, 2, 3, 27, 37, 53, 75, 81, Result, 4, 14, 19, 27, 30, 46, 48, 53,
142, 143, 148, 150, 207 55, 67, 70, 71, 75, 78, 79, 83,
Pre-emptive strategy, 35, 60, 61 91, 92, 94, 97, 102, 104, 105,
Premium, 5n2, 86, 149, 155–157, 114n2, 116, 120, 121n4, 126,
159, 161 134, 135, 140, 141, 144, 147,
Price risk, 65, 131, 145–146, 148n2, 158, 159, 161, 162,
159–162 166–168, 170, 173, 175–177,
Privatization, 89–95 177n3, 178n5, 181, 182, 184,
Protection of resources, 18–20 186, 188, 192, 194–197,
Purchasing, 16–18, 37, 42, 62, 75, 202–204, 211, 215
78–82, 92, 99, 100, 124, 136, Risk, 2–4, 6, 37, 39–45, 51–57,
137, 143, 146, 151–153, 156, 60, 63–67, 69, 70, 72,
158, 159, 161, 206n29, 207 74–77, 83, 85, 89, 90, 95,
Put, 42, 43, 49, 64, 83, 100, 117, 96, 98, 99, 103–105, 115,
118, 155, 160, 161 116, 118–121, 126–127,
129–162, 168, 174, 184,
193, 194n18, 201
R Rumelt, R. P., 12n6, 45
Recentering, 35, 36
Re-focusing, 36, 38
Reinvoicing, 138, 139 S
Religion, 169, 172, 176, 178n7, Short, 8, 32, 39n5, 70, 99, 148n2,
180–186, 180n10, 200, 209, 152–155, 162
210 Sociological theory of identity, 176
Reshoring, 15, 20, 34, 37, 38, 44, Spin-off, 36, 120, 120n3, 121,
111–127 121n4, 213
Resource, 2, 5, 7, 7n4, 9, 11–16, Spot exchange, 156
18–20, 26–31, 34–36, 38–41, Strategic alliance, 54, 71, 73, 95–97,
45, 48, 50, 54, 59–61, 65–67, 104, 136, 169n2, 170, 213
69–72, 74, 76, 77, 80, 82, Strategic analysis, 10, 26, 63
84–86, 88, 89, 94, 99, Strategic planning, 62, 129, 171
232 Index
Strategic risks, 70, 118, 120, 122, Transaction costs theory, 102
124–126 Transfer prices, 132, 134, 138–140
Strategy, 25–57, 59–105 Turn-key investment, 97, 207
Strike price, 155–157, 160, 161
Supervision node, 137–139
Suppliers, 2, 17–20, 25, 37, 43, U
44, 63, 64, 67, 70, 76, United States (US), 1–3, 8, 9, 16,
78–80, 82, 96, 100, 116, 17, 20, 34, 36, 38, 42, 43, 46,
117, 119, 122, 124, 125, 82, 87, 111, 122, 154, 159,
136, 158, 160 160, 177, 192–199, 207n31,
Swap, 132, 149–151, 157–161 208, 213
Switch, 60, 100
Synergy, 34, 39, 40, 44, 48, 49, 54,
71, 87, 93, 95, 97, 193, 194, V
208 Values, 26, 39, 41, 45, 46, 49–51,
System, 9, 10, 16, 20, 25, 30, 32, 55, 60–62, 67, 69, 71, 78–81,
41, 43–45, 47, 47n7, 51–54, 85, 90, 91, 99–103, 113–115,
53n10, 65, 76, 78, 89, 91, 93, 120, 130, 140, 141, 143, 144,
103, 112, 114, 117, 120n3, 146–151, 148n2, 153–155,
125, 130–132, 135, 138–140, 159–162, 165, 166, 168–190,
142, 144–151 191n14, 192, 192n16, 194,
Systemic, 1, 51–57, 71, 95, 115, 194n18, 196, 202, 213
124, 133, 134, 137, 141, 147, Vernon, R., 1, 3, 4
183 Vertical integration, 72, 82, 83, 87
Vision, 26, 27, 39, 48, 52, 114–116,
118, 133, 184, 185, 191n15,
T 196, 214
Theory of market power, 6, 83, 86
Total Return Swap, 149, 150
Trade, 3, 6, 50, 60, 67, 72, 75, 97, W
98, 105, 124, 189, 199, Weakly connected system, 51, 53,
209–216 53n10
Transaction costs, 10, 83, 103, 113 Wholly owned subsidiary (WOS), 120

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© The Editor(s) (if applicable) and The Author(s) 2019

3 Market Entry Strategy 59

4 Outsourcing and Reshoring 111

5 Key Risks of Internationalization 129

6 The Role of Culture in Internationalization 165

Fig. 1.1 The determinants of internationalization choices. Source: Our

 an International Business Theories Interpret

–– The weak systemic connection in the oligopolistic structure of the US

© The Author(s) 2019 1

–– The dollar’s continued appreciation against foreign currencies, typical

Chandler’s analyses show the sequential stages of development of large

known, required investment in new areas of the surplus liquidity created

According to Vernon, the company, by developing innovative tech-

The same interpretative limits are also present in Hymer’s theory of

and of “firm-specific” activities) that end up distorting the input prices

the acquired knowledge and implemented it in their organizations while

 oes Dunning’s Eclectic Paradigm Help

According to the eclectic paradigm, the business’s internationaliza-

should be achieved at the same time is ignored: advantages of cultural

 n Interpretative Framework from A Resource-­

Resourced-based theory6 considers the company as the source of com-

Based on the information given earlier, the determinants of the inter-

Knowledge exploration International leadership

 Market knowledge acquisition

Protection of resources Resource seeking

Fig. 1.1 The determinants of internationalization choices. Source: Our

–– appropriating the knowledge of the competitors present in the target

–– acquiring new resources and skills needed to innovate products and

Knowledge Exploration: Some Empirical Evidence

(a) Tacchini Group, from Hembling International Holdings Limited, which

International Holding Limited, one of the main Asian groups specialized

International Leadership: A Case Study

SonnenBatterie units. In addition to the SonnenBatterie, Sonnen’s energy

The protection of resources determinant highlights the case in which the

–– imitate competitors, so as not to be at a disadvantage in terms of costs,

Protection of Resources: A Case Study

materials or to intermediate products, thereby also reducing the uncertainty

Lastly, the resource-seeking determinant highlights the case in which

Resource Seeking: A Case Study

Knickerbocker, F. T. (1973). Oligopolistic reaction and multinational enter-

Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management

© The Author(s) 2019 25

environment, aimed at generating, selecting, and governing the variance

The strategy’s formulation must allow managers to identify the possi-

 he Role of Core Factors in Development

Core Factor Development

Positive sum growth International International

Fig. 2.1 Internationalization strategies. Source: Our elaboration

The ITR Group: Case Study

Did you have problems related to HR selection?

this subject, in detail, it is important to stress that local companies in

in the proposed interpretation key, included in the diversification

International diversification strategy: An example

Internationalization for diversification is often motivated by the need to

may potentially be acquired, or are forced to abandon a market due to

more attractive markets has often been imposed by hostile behaviour in

International Downsizing Strategies. Some Empirical Evidence

Lastly, if the strategies involve a discontinuous, negative or zero sum

International Re-focusing Strategies: Some Empirical Evidence

Internationalization for Diversification:

3 Market Entry Strategy 59

4 Outsourcing and Reshoring 111

5 Key Risks of Internationalization 129

6 The Role of Culture in Internationalization 165

an International Business Theories Interpret

oes Dunning’s Eclectic Paradigm Help

n Interpretative Framework from A Resource-

Market knowledge acquisition

he Role of Core Factors in Development

Internationalization for Diversification:

Standardization Versus Adaptation

of rendering business activities ineffective, and those, inherent to point-

The Risks of a Systemic Disconnection

The Main Steps of International Expansion

Choice of Entry Mode

• internal development, implemented through the company’s know-

Competitive Entry Modes: Import/Export

he Integration Processes: Foreign Direct