Chapter no.

2
PREPARED BY SAQIB GHIAS
Internationalization Theories
Internationalization Process Theory
Most well-known as Uppsala model or stage model
Considers internationalization as an incremental process of acquisition, integration and use of
knowledge on foreign markets
Direction of the incremental internationalization process: establishment chain (no exports,
exports with the help of independent representatives, building one’s own sales office, on-site
production) and psychic distance (cultivation of countries with lower psychic distance and
gradual expansion)
Internationalization process theory
State and change aspect
The theory focuses on four aspects that firms should face while going abroad:
Market knowledge and Commitment, and Commitment decisions and current activities which are
divided into stage and change aspects that interact with each other in what seems to be a cycle.
The Internationalization Process theory
Internationalization process theory
State and change aspect
State aspects are the resources committed to the foreign market: Market knowledge and
commitment decisions that would affect the firm’s opportunities and risks.
Market commitment stands for those resources that will be committed as well as the degree of
involvement.
Market knowledge helps the managerial team to make decisions. • There are two main types of
knowledge:
Objective knowledge: which can be transferred from one market to another
Experiential knowledge: which is gained by experience, learning by doing or acting
Internationalization process theory
Change Aspects
Change aspects are the results of the state aspects. Once the firm know about the market they can
decide the way the firm will commit to that market, and will therefore be able to plan and execute
the current activities needed to complete the cycle by committing to the market.
The basic assumption of the Uppsala Model is that market knowledge and market commitment
affects both the commitment decisions and the way current decisions are performed and this, in
turn, changes market knowledge and commitment. The amount of knowledge of foreign markets
and operations is influenced by the amount of commitments of resources in foreign markets, and
vice versa
Internationalization process theory
Critics of Uppsala process model
The model is too deterministic
Does not take into account interdependencies between different country markets
Not valid for service industries
Not valid in situations of highly internationalized firms and industries
The world has become more homogeneous: psychic distance has decreased therefore the firms
willing to enter into large markets
Reduce uncertainty: buy knowledge about legal and financial standards from international
consulting firm
Firms today has easier access to knowledge ex throw information technologies
The Network Theory
Network Theory
A network is a set of two or more connected business relationships, in which each exchange
relation is between business firms that are conceptualized as collective actors. (Emerson, 1981) .
Networking is seen as a source of market information and knowledge, which are often acquire in
longer terms when there are no relationships with the host country. Therefore, networks are a
bridging mechanism that allow for rapid internationalization (Johansson & Mattson, 1988).
The emphasis of the network approach is in bringing the involved parties closer by using the
information that the firm acquires by establishing close relationships with customers, suppliers,
the industry, distributors, regulatory and public agencies as well as other market actors.
Relationships are based on mutual trust, knowledge and commitment towards each other
Network Theory
The ties resulted from the firm’s network, are hard to imitate. These ties have consequences in
three dimensions: a) the information is available to the parties involved in the relationship; b)
timing, and c) referrals.
Firms learn from the ties made in the network, information about what is going on in the market
is open to the network itself. Thus, there is information that is not available for everyone.
Ties influence on timing when some information reaches a particular firm. And referrals firms
get interested on other firms, in the right time and place.
Ties may be strong or weak. The strength of ties is determined by the combination of time,
emotional intensity, intimacy and the reciprocal services of the ties.
Network perspective
The first step a firm must follow in order to internationalize is the understanding of the market
where it operates, its environmental conditions and the firm’s relationships.
Firm will internationalize, only when the number and strength of relationships brought up in the
network increases, helping their international extension.
By using trust and increasing commitment in established foreign networks, the firm gains
penetration.
Network Theory
After gaining penetration, firms can gain international integration by using the network and
getting involved with other firms in various countries.
Using these steps relationships are formed, gaining the access to the market and its resources.
Resources can be controlled by the firm itself as well as other actors involved in the network
depending on the position in the network
Eclectic paradigm Economic theory
It is also termed as OIL theory (Organization or Ownership Internalization-Location). The core
content of this theory is that the firm to be engaged in international business is decided on the
ownership advantages, internal advantages, and location advantages
The theory states the following
If firm only has ownership advantages, then, the enterprise should choose licensing arrangements
means of technology transfer.
If firm has ownership advantages and internalization advantages, it should select domestic
production and exports.
If firm has the ownership, the internal, and location advantages of the three at the same time, the
enterprise will choose foreign direct investment
Eclectic paradigm Economic theory
Eclectic paradigm Economic theory
Eclectic paradigm Economic theory
Organization (Ownership) advantages
It is the capabilities for businesses to meet their current or potential customers demand.
Ownership, firm specific advantage, includes Patent and Trade Market, Technology, Name
recognition, Core competency of a firm i.e., an ability meeting with the current/potential
customers’ demand.
If having the ownership advantages, the enterprise should choose licensing arrangements way to
proceed the technology transfer over other forms of entry. The licensing specific advantages such
as knowledge-based software, patent items or intellectual properties.
Eclectic paradigm Economic theory
Internalization is about decision to make an activity internal to the firm, there’s got to be an
advantage of internalized.
Internalization comes about from market imperfections. Firms having the ownership advantages
of intangible assets, through the expansion of their own organizations and business/management
activities and the use of internalizing these advantages, will obtain more than non-equity transfer
potential or real profits.
Firms with the ownership and internal of the competitive advantages do not necessarily have to
choose foreign direct investment. They can also choose to expand domestic scale, and then
exports to be fully rewarded.
Eclectic paradigm Economic theory
Location advantages
It is external advantages to the firm. It is not owned by enterprises but by the host country;
therefore, enterprises can not control discretionally, but adjust and take this advantage. It is
mainly characteristic in three aspects:
Immovable factor and endowment of the host country, such as natural resources, convenient
geographical location, a large population
Host country's political system, policies and regulations with flexible, concessive, and other
favorable conditions (i.e., free tariff barriers) • Formation of good infrastructure and gathered
economy
Eclectic paradigm Economic theory
Location advantages
Location factors directly affect foreign direct investment of MNEs on the decision on the location
and the international production system layout, a fully foreign direct investment rather than
necessity.
Meeting with the following three advantages, firms will have global oligopolies:
Strategic advantage which allows it to compete effectively with domestic firms.
Select countries for investment which have attractive sourcing and/or marketing environments.
Managerial ability to coordinate operations located in foreign countries at a cost that is less than
the benefit received from operating in these locations.
International Entrepreneurship theory
International entrepreneurship is defined in this study as the development of international new
ventures or start-ups that, from their inception, engage in international business, thus viewing
their operating domain as international from the initial stages of the firm's operation.” -
McDougall (1989)
“IE is the discovery, enactment, evaluation and exploitation of opportunities across national
borders to create goods and services” – Oviatt and McDougall (2005)
International Entrepreneurship theory
International New Venture: „a young entrepreneurial firm that is virtually engaged in
international business right from inception“ (Oviatt & McDougall, 1994).
International New Ventures (INVs) think about internationalization from the point of inception or
they internationalize right from or shortly after inception
International Entrepreneurship theory
IET focus on entrepreneur
Individual and entrepreneurial behavior is the basis of foreign market entry.
Entrepreneur possesses the skills and enough information to measure the opportunities in the
market with ability to create and make stable relationships with other firms, suppliers, customers,
government and media.
The entrepreneur needs to be opportunity seeking and internationally experienced in order to
exploit the opportunities he might see in the market and be able to commit to it through
entrepreneurial activities that would be translated as entrepreneurial services
Comparison of Internationalization
theory
Uppsala view Eclectic view Network view IE view
A process of gradual The extent, form and Internationalization is Proactive
international pattern of international the exploitation of internationalization
involvement with production was network advantage. process and consider
developing market determined by three Relationship of a firm entrepreneurial behavior
knowledge and advantages: ownership can be used as bridges to and activities in bringing
commitment of (O), location (L), other networks new opportunities
resources. Internalization (I)
Comparison of Internationalization
theory
Uppsala view Eclectic view Network view IE view
Stages mode: The more O advantage Establishment of Entrepreneur with more
progression from regular the higher propensity to relationship in country prior experiential
exporting, exporting via internalize the O network and knowledge of
partners to overseas advantage and the more development of those international market will
manufacturing. Start attractive a foreign relationships in those identify enact and take
with low Psychic country as a production network (penetrate). entrepreneurial activities
distance to higher. location, hence the Connect those network through the firm
greater L advantage in different countries.
determine the entry
mode.
Comparison of Internationalization
theory
Uppsala view Eclectic view Network view IE view
Emphasis on importance High explanatory value Focus on the dynamics Not only focus on firm
of learning process in for global firms and and evolution of alone, gives more
internationalization provides string logic for internationalization importance to
internationalization rather than just motives entrepreneurs and his
or patterns activities that benefits
the firm
internationalization
process
What is a Trade Bloc?
A group of countries
→ Which are geographically close to each other
→ Have similar trade policies
→ With their mutual co-operation allow free flow of goods Trade blocs have liberal rules for the
member countries and separate set of rules for the non-member countries
They facilitate trade to member countries of the group but create barriers and block the trade of
member countries
Objectives of Trade Blocs
→ Reduction of trade barriers among the member countries
→ Maintaining better relations
→ Imposing barriers on non member countries
→ Promoting free transfer of labour, capital and other factors
→ Creating common currency and Central Bank
→ Collective Bargaining
→ Assisting member countries
→ Enhancing welfare of consumers
Positive Effects of Trade Blocs
→ Economic Integration
→ Co-operative Spirit
→ Expansion of Markets
→ Growth and Development of the region
→ Uniform policies
→ Increase in trade
→ Product and Market Development
Negative Effects of Trade Blocs
→Negative effects are for the non-member countries
→ Common External Barriers
→ Absence of Collective Bargaining
→ Affects Competition
→ Affects global and international trade
→ High Tariffs
→ Import Restrictions
→ Loss of Political Sovereignty
NAFTA
NAFTA stands for North American Free Trade Agreement
An agreement signed by Canada, Mexico, and the United States
It came into force on January 1, 1994.
NAFTA has two supplements:
North American Agreement on Environmental Cooperation (NAAEC)
North American Agreement on Labour Cooperation (NAALC)
It is the most powerful trade bloc of the world Intra-regional trade between the member countries
is US $ 767 Billion
OPEC
OPEC stands for Organization of the Petroleum Exporting Countries.
An oil cartel whose mission is to coordinate the policies of the oil-producing countries.
It is headquartered in Vienna, Austria
Member Countries:
1. Iraq 2. Kuwait 3. Iran 4. Saudi Arabia 5. Venezuela 6. Libya 7. United Arab Emirates 8. Qatar
9. Indonesia 10.Algeria 11.Nigeria 12.Ecuador 13.Angola 14.Gabon.
ASEAN
ASEAN stands for Association of Southeast Asian Nations. It was formed on 8 th August 1967.
It is a political and economic organisation of ten countries located in Southeast Asia
Type: Economic Union Members:
1. Indonesia 2. Malaysia 3. Philippines 4. Singapore 5. Thailand 6. Brunei 7. Myanmar 8.
Cambodia 9. Laos 10. Vietnam
It’s aims include:
→ Accelerating economic growth → Social progress → Cultural development among its
members → Protection of regional peace and stability → Opportunities for member countries to
discuss differences peacefully
SAARC
SAARC stands for South Asian Association for Regional Cooperation Headquartered in
Kathmandu, Nepal
It was established on 8th December 1985
Members:
1. Afghanistan 2. Bangladesh 3. Bhutan 4. India 5. Maldives 6. Nepal 7. Pakistan 8. Sri Lanka
The SAARC policies aim to promote: Welfare economics Collective self-reliance among the
countries of South Asia Accelerate socio-cultural development in the region Develop good
external relations
EU
EU stands for European Union. Came into existence on 1 st January 1958
It is headquartered at Brussels, Belgium It has 28 member countries: 1. United Kingdom 2.
Belgium 3. Finland 4. France 5. Germany 6. Netherlands 7. Norway 8. Poland 9. Portugal 10.
Greece and 18 more
In January 1999, a common currency € (Euro) was introduced Type: Economic Union EU offers
financial aid to the developing countries
It is a strong trade bloc politically, industrially and economically
Culture Importance in International
Business
National Culture as a point of reference
The shared values, attitudes, and beliefs of a group of individuals constitutes a culture
Culture is an elusive topic to study, partly because people belong to multiple cultures based on
their nationality, ethnicity, religion, gender, work organization, profession, age, and income level
The Nation as Cultural Mediator
Culture Importance in International
Business
Not everyone therein shares the same values and attitudes,
Subcultures exist within nations,
Some people have internalized more than one culture,
Cultural similarities link groups from different countries.