Internationalization Process Essay
The theory imperfect markets (Hymer 1976) focuses on how a foreign firm that has incomplete information of local conditions can productively compete in the local market. This approach observes that firms primarily entering a foreign business climate are competitively handicapped because of the additional costs of dealing with the new setting. To defeat this handicap, the firm must possess ownership advantages over its competition. The theory implies that the survival of imperfect markets and a firm’s exclusive advantages are catalysts for FDI.
The market imperfections theory leads to the following reasons for the existence of FDI: (1) imperfections in the goods markets, such as brand names, marketing skills, product differentiation, and price collusion, which other firms do not have; (2) imperfections in the factor markets, such as exclusive resourcing capabilities, proprietary managerial skills, and technology; (3) imperfect competition because of external and internal economies of scale, which escorts to cost declines that in turn affect a firm’s ability to endure; and (4) imperfect competition caused by government interference when government-imposed policies offer FDI opportunities (Kalfadelis and Gray, 2002; Hymer 1976). Strategic Behavior Theory The dynamics of international competition as a possible clarification for the pattern of FDI offers a substitute framework.
Knickerbocker (1973) observes the tendency of firms in an oligopolistic industry to move in tandem to maintain industry stability. Under such a theory, firms resort to matching the strategic behavior and activities of their rivals (i. e. , follow-the-leader theory) to minimize risk and uncertainty. Graham (1978) likewise notes that FDI represents an exchange of threats between oligopolistic firms. Motivated by the want to reduce risks under great uncertainty, most firms in oligopolistic industries resort to imitating each move that their rivals make, including the establishment of production amenities abroad. For example, when oligopolistic firms in the United States invested in Europe, European firms in turn invested in the United States.
In a reformulation of Graham’s thesis, Casson (1987) also shows that firms in global industries use FDI as a preventative strategy, that is, as a way to defend their domestic markets from foreign competition by waging competition through FDI in the latter’s own market. The Uppsala model claims that the internationalization process is experience-based, local, chronological, and dependent on feedback. It proposes that: (1) organizational routines and procedures based on experience drive firms’ internationalization; (2) the internationalization of a firm is trial-and-error based; and (3) firms have imperfect knowledge of the institutions and customers abroad. Knowledge of institutions and customers abroad is accumulated by conducting international operations.
This accumulated knowledge drives internationalization (Simpson and Kujawa, 1974; Ayal and Zif, 1979; Denis and Depelteau, 1985) by influencing the entry-mode selection (Johanson and Wiedersheim-Paul, 1975; Davidson, 1980; Gatignon and Anderson, 1988; Franko, 1989; Goodnow and Hansz, 1972; Kogut and Singh, 1988; Stopford and Wells, 1972; Calof and Beamish, 1995) and the country-market selection (H”rnell, Vahlne, and Wiedersheim-Paul, 1972; Nordstrom, 1991; Kogut and Singh, 1988; Vernon, 1966; Davidson, 1983; Weinstein, 1977; Erramilli and Rao, 1993) as well as growth in the markets (Barkema, Bell, and Pennings, 1996). In the process of internationalization, the knowledge accumulated in firms must speak to business, institutions, and internationalization (Eriksson et al. , 1997). Knowledge of both market and firm is required, and compatibility between a firm’s existing resources and those needed abroad is crucial (Madhok, 1996). In a new assignment abroad lack of knowledge generates costs. We propose that accumulation of the above three kinds of knowledge is exaggerated by variation in the internationalization process of firms. Internationalization knowledge reveals a firm’s ability and resources to engage in international operations (Yu, 1990).
It operates as a repository in which knowledge may be retained for a period of time (Loftus and Loftus, 1979) and supplies decisional stimuli and responses that are preserved in the firms and have behavioral consequences when recalled (“Organizational Memory,” 1991). Business knowledge concerns aggressive situations in specific markets and clients in these markets. Institutional knowledge is information about the governance structures in specific countries and their rules, regulations, norms, and values. The internationalization process model explicitly emphasizes that the internationalization of firms entails accumulating knowledge of particular markets and clients. In international markets, a lack of knowledge about a particular client’s way of making decisions and his idiosyncratic requirements regarding products and services is problematic.
Thus, there is a need to cultivate relationships to acquire firsthand experience of the customers’ preferences, practices, and customs and to display the available products and services to potential clients (Denis and Depelteau, 1985). Operations in the market allow the internationalizing firm to accumulate the kind of institutional and business information it requires and to understand the information in a firm-specific background (Carlson, 1974). Research on learning shows a positive association between variation and knowledge accumulation in firms. Firms exposed to a variety of institutional and business actors experience a wider variety of events and therefore learn more (Mezias and Glynn, 1993).
Such firms are better at spotting problems, errors, and opportunities than firms exposed to only a narrow range of international business and institutional actors. Firms that remain in a single industry may continue to use the same knowledge base as well as the same routines and structures and thus may perform less well than firms exposed to a variety of industries. Operations in diverse markets, however, expose the firm to different clients and competitors and to diverse sets of institutional rules, norms, and regulations (Argyris and Sch”n, 1978). Such firms experience multifaceted change, tend to be more innovative on technical and marketing issues, and usually have more knowledgeable managers (Mezias and Glynn, 1993).
Firms operating in a variety of international environments are also likely to possess multiple product and production technologies. Such firms attain more knowledge and gain advantages by being able to select the technology and production methods that suit particular institutional environments and business actors abroad. Firms operating in a variety of cultural environments may be better placed to decrease the cultural differences between a current foreign subsidiary and a new international market. This is a benefit, because differences between nations can make international operations hard (Kogut and Singh, 1988; Barkema, Bell, and Pennings, 1996).
Thus, experience to variation enables internationalizing firms to build up knowledge from a richer variety of business and institutional actors, so that a double-loop learning process more simply evolves in such firms. Exposure to a richer set of business actors and institutional surroundings may set in motion a process whereby the internationalizing firm’s current assumptions regarding business and institutional actors are confronted with a novel “reality. ” The feedback process from this questioning may force the firm to think again and amend its existing theory-in-use as well as its organizational practices and strategies, convincing it to develop new technological solutions, goods, and thoughts.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 19 April 2017