Internationalization And Globalization

2.1. Internationalization and globalization

This section attempts to clarify the distinction between two important concepts in international business, internationalization and globalization, and the manner in which they are going to be used in this paper. The two terms have been debated in the literature with different viewpoints on the meaning, definitions, similarities and differences. In accomplishing this, I focus on the definitions of each and involve the possible strategies adopted by multinationals, global or regional.

Internationalization is the process through which an enterprise goes into a foreign market . This process represents the series of actions performed by a company aiming to do transactions other than in its home country.

Internationalization has also been defined from a more entrepreneurial perspective as identification and exploitation of international opportunities of new exchange arrangements with new partners in new market (Ellis, 2011).

Globalization, as defined by (Surugiu & Surugiu, 2015) is a process of international integration, characterized by the expansion of international transactions of goods and services globally and attributed to the advancement of fields such as IT or transport. This perspective on the globalization process is enriched in a study conducted by Pekarskiene and Susniene, who define it as the global internconnectedness of trade, capital and people and identify foreign direct investment as one of the drives of such a process. A similar approach of the existence of a „globalization trend”, adopted by the authors (Maeseneire & Claeys, 2010), (Knight & Kim, 2005). There are considerable viewpoints agreeing on the existence of globalization with some authors arguing for the emergence of a global culture as a result of the globalization process and the increase of global firms (Stevens and Bird, 2004), thus asknowledging and emphasizing a global perspective on international trade.

Nevertheless, this approach of globalization is not unified across the internationational business literature. Moreover, the distinction between internationalization and globalization can be clarified by using the grouping of world economic activity into the three regions called „the Triad”, as opposed to globally (Rugman, 2009). The Triad consists of:

North America;

Europe;

Asia Pacific.

The two notions can be better defined by use of their connection to the strategies adopted by multinational enterprises, namely regional versus global. Building on this classification, a global multinational enterprise is charcterized as having more 20% of its sales in each of the three regions of the Triad and less than 50% of its total revenues derived from its home region (Rugman & Verbeke, 2008). Following the arguments presented above, it helpful to define the multinational enterprise as a company with headquarters in a country and having operations in one or more other countries.

Keeping in mind the geographic scope of the activities and structure of multinationals, a framework named a „regional solution” was developed by the aforementioned authors as a better suited option than the transnational solution already existent in literature and which is most suitable to global or transnational firms who have their assets and revenues uniformly distributed accross the world. The regional solution framework will be detailed in further section of this paper.

This regional outlook on international trade provides a deisgn for developing effective strategies for multinational enterprises, through considering the impact of triad competition rather than global, adopting regional strategies which are responsive to the tastes of local consumers, centering on adaption of products and services and opposed to standardization.

Summing up, although there is a divided vision on internationalization and globalization, the importance of multinationals’ responsiveness to regions and adaptation of their offerings cannot be denied, as far as their impact on their international success.

2.2. The internationalization process

This section reviews key concepts and findings pertinent to the successful internationalization of firms and with a focus on the internationalization of a SME, concentrating on similarities and difference between this process for both classes of companies, in an effort to identify the best opportunities for internationalization for the case study developed in chapter 3 of this paper.

Internationalization has also been defined by (Skudiene, Auruskeviciene et al, 2015) as international operations of a firm which are enhanced by an e-marketing and technologies’perspectives on management. In this view, the success of the process is influenced by:

Information availability and usage,

Having an international mindset

Networks in international business

Communication interactivity

Having an E-marketing approach.

The reasons for which firms decide to pursue internationalization are plentiful:

To protect themselves against risks of possible economic distress in the home country, by means of diversifying;

To tap into the perceived attractive foreign markets;

To divert foreign competition and protect their home-country market share, possibly using a follow the competitor strategy, aiming to show the competition the ways in which the company can retaliate to a possible threat of domestic market threat;

To reduce costs, through employing the processs of internalization of control;

To overcome trade barriers from within the host-country market, i.e. tariff or non-tariff barriers;

Exploit its technological expertise by producing itself the goods.

There are five basic methods of internationalization: licensing, exporting an agent or distributor, exporting through a sale representative or sales subsidiary, establishing local packaging and/or assembly and finally investing in the foreign country (Rugman & Collisun, 2009).

The first type of foreign entry – licensing – involves receiving a fee or royalty by the licensor from the licensee in exchange for access to patents, technology or trademarks. Although it is represented as the first step in the generalized internationalization process presented below, it is important to mention that its positioning in the process depends of the whether the enterprise seeking internationalization produces a standardized product, for which technological or managerial advantages are not diminished. In the latter context described, thip internationalization step comes much later in the process, after FDI.

After having done exporting as a means to generate extra sales or perhaps getting involved in a foreign market in order to sell surplus production, a firm may start exporting through a sale representative or a sales subsidiary. The setting up of the two allows the company to create a more stable foreign revenues stream.

The next stage in the internationalization process is to set up a local assembly or packaging. Such a stage generally implies a familiarization of the company with the foreign market and its engagement in the foreign market is completed through increasing its labor force by adding employees from the host market. Consequently, the company has to deal with the factor conditions of the foreign market.

The last stop in the internationalization process is engaging in foreign direct investment. After surpassing the perceived risks associated with foreign market entry, the firm is ready at this stage to produce a whole product line in the host market.

A good illustration of the possible steps firms can take in the internationalization process is provided below (Rugman & Collisun, 2009), and summarizes the various steps and the risks perceived by the firm at each step.

Source:

Although this Internationalization Process Model synthesizes well the stage followed by a firm wanting to enter a foreign market, it represents a generalization and the actual path of the company can differ since the final decision belongs to the company and it is influenced by its particular circumstances (Rugman and Collinsun, 2009), such as:

Risk aversion, which can make the firm adop a cautious approach to internationalization;

Brand awareness or lack of thereof which can deemphasize certain internationalization methos such as licensing and more straight to exports

The authors (Rugman and Collinsun, 2009) also suggest making use of outsourcing specialists in international trade, as a measure to offset the export marketing costs generated by the firm’s lack of knowledge of the foreign market, until they can benefit from the „the learning effect”achieved after acclimatization to the new market.

There are a few approaches in analyzing the foreign market considered by the internationalizing enterprise, including: PESTEL analysis, comprising political, economic, social, technological, legal and environmental factors and SWOT analysis, illustrating internal strengths and weaknesses, opportunities and threats. However, these two classical components of an environmental analysis have limitations from the viewpoint of (Omran & Khorshid, 2013), who propose an Intelligent Envirnmental Scanning Approach (IESA), a framework which integrates three components including PESTEL and SWOT, aswell as structural analysis.

2.3. Assessing competitiveness

A concept of particular importance in international trade theory is competitiveness, as it shapes the strategy and it represents the main factor influencing the success of internationalization efforts.

There exist many theories on the concept of competitiveness, ranging from mercantilism, to absolute, competitive and comparative advantage, relative endowment with production factors theory, with recent approaches taking into account the regional nature of trade, (Voinescu & Moisoiu, 2015). The mercantilism view of competitiveness, characterized by a zero-sum approach by nations, aswell as protectionist measures taken, which inhibit international trade with the scope of achieving a positive balance of trade has been replaced by more modern approached. The abolute advantage perspective on competitiveness focuses on the ability of a nation to produce and sell a good at a lower cost than any other nation. Furthermore, this absolute advantage would be derived from either natural advantages or the country, identifiable with factor condition or country specific advantages, or due to the production technology. However, this concept of competitiveness cannot explain the dynamics in the international trade arena. A comparative advantage approach implies that countries choose to specialise in producing goods requiring lower opportunity costs than for a trading partner. This theory of competitiveness, due to its critiques, i.e. invalid for countries having the same opportunity costs and it is rather limited in explaining the international trade flows today. The same rationale for explaning competitiveness is used in the H-O model or relative endowment with production factors, which still does not take into account influences from market size, product differentiation or economies of scale (Voinescu & Moisoiu, 2015).

Recent approaches of competitiveness, which explain some of the shortcoming of the approached mentioned above, will be discussed in more detailed in the following section comprising the foreign specific advantages-country specific advantages matrix and the diamond framework for country competitiveness.

The FSA-CSA Matrix is a analytical framework, useful in determining the generic strategy to be pursued by a multinational enterprise, determined through the interaction of:

Firm Specific Advantages or FSAs, defined as unique capabilities pertaining to the firm,

Country Specific Factors or CSAs, strengths or benefits specific to a country, stemming from the configuration of the competitive environment, labor force, geographic location, government policies and so on.

In the interpretation of the following matrix, it is necessary to account that the strength of a FSA implies that, keeping CSAs constant, the company has a potential competitive advantage.

Low-cost leadership strategies are generally pursued by globally oriented firms, who anufacture commodity type of products or who rely heavily on resources. In the context of the CSA-FSA matrix, this companies focus on CSAs identified in through the means of Porter’s Diamond, under factor conditions.

The combination of weak CSA-weak FSA is represented by companies who need to either exit the market or restructure their strategy and operations. However, this quadrant of the matrix includes also SMEs with little global involvement.

The firms having both strong FSAs and CSAs select any of the strategies comprised in the matrix, although they generally choose a differentiation strategy, possibly based on low cost.

Differentiation strategies suit companies which possess strong firm specific advantages stemming from the internalization of intangible assets, such as customization, marketing or production knowledge. Furthermore, their lack of country specific advantages do not affect them in the long run and they can benefit from either low cost or price competition strategies.

Porter’s Diamond Model provides insight into capturing the country specific advantages, which will be detailed in the following section. Michael Porter’s Diamond Model is a necessary tool for analyzing the opportunities for success of nations in international markets. The four compenents of Porter’s Diamond Model are visually represented and describes below along with their influence on the economic competitiveness of nations.

Fig.:

The first component of the model incorporates land, capital and labor, together forming the factor conditions. The rationale behind this element is that a nation will choose to export the goods and services for which it can exploit its particular resources, i.e. highly knowledgable labor pool. In establishing a strong foothold in an international market, a country should work toward forging specialized factors and continously upgrade them (Rugman & Collinsun, 2009).

Demand conditions is another determinant in a nation’s competitiveness which is increased by a strong local demand manifested for a company’s offerings. Furthermore, the relationship between the two is such that it provides the firm a strong indication of the needs and desires of customers and they geographic proximity allows it to be ahead of the more distant competition in addressing such concerns.

The third factor of the model pertains to the related and supporting industries which can impact the companies through their own international competitiveness. The manner in which this can be accomplished is again linked to their geographic proximity which generates inputs at lower costs. Another means of increasing the ability of firms to compete effectively of first through related and supporting industries is by sharing information between producers and supplier, reaching synergy.

The final determinant of Porter’s Diamond Model is represented by the environment, focusing on:

The structure prefered by companies at a national level i.e. small versus large, hierarchical organizations.

National goals, which can be related to the sixth dimention of indulgence versus Restrained of hofstede’s 6-D Model. This component of the environment connects to the preference manifested by some countries for fast result i.e. rapid financial returns versus a preference for mature industries, where the return is moderate and the financial investment and research required are substantial (Rugman & Collinsun, 2009).

The Domestic Rivalry aspect of the environment ties strong local competition on the domestic market with a high international competitiveness.

It is important to mention here that the Diamond Model’s components should be interpreted in connection with each other, placing higher importance on domestic rivarly, as this can have considerable influence on the other three components (Rugman & Collinsun, 2009).

2.5. Differences between the internationalization of large companies versus SMEs

One of the features differentiating SMEs and large companies impacting the internationalization outcome is their entrepreneurial orientation. The importance of this feature is its impact on the performance of the firm, with studies suggesting that entrepreneurial orientation and firm performance are positively correlated. However, (Sidik, 2012) proposes a conceptual framework for integrating five key constructs influencing the relationship between the two concepts, aiming to aid entrepreneurs and SMEs in developing and increase performance. The study integrates five concepts: innovative performance, innovative capacity, organizational search, market orientation and entrepreneurial orientation, summarized below:

SMEs’ innovative performance is positively correlated with firm performance;

SMEs’ organizational search is positively correlated with innovative performance and innovative capacity;

SMEs’ innovative capacity is positively correlated with the innovative performance and mediates the relationship between the latter and organizational search;

SMEs’ entrepreneurial orientation is positively correlated with market orientation, organizational search and entrepreneurial traits;

SME’s market orientation intervenes in the relationship between entrepreneurial orientation and organizational search, while also correlating positively to the innovation capacity.

Another feature distinguishing the internationalization process of the two companies is represented by the more severe financial constraints for FDI faced by SMEs as opposed to large companies. This disadvantage of SMEs in attracting funds for FDI can be explained by the biases of domestic banks in analyzing SME investing projects and a capital gearing approach in deciding credit granting, high interest rates and collateral requirements (Maeseneire and Claeys, 2012). The implication for the internationalization of this feature is that the financial gap experienced by SMEs inhibits the development of the firm in both the home country and in doing FDI.

Ways of Increasing internationalization success

In a study conducted by Paul Ellis, social connection with known others are shown to provide access to distant and valuable opportunities. This research developed using 665 entrepreneurial exchanges revealed that 40% of these can be attributed to social ties.