Internationalization Model Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The internationalization process of the firm has been of interest to researchers for decades. Indeed, the process of internationalization has been the subject of widespread theoretical and empirical research.

Over this time, the views about the process of foreign expansion and about drivers explaining the logic of the process have evolved.

One difficulty with scholarship relating to internationalization is that most of the research has concentrated on large firms, using cross-sectional studies or case studies and often focusing on one country of origin. However, the internationalization of smaller firms across different countries and regions has increasingly been of more practical concern to international business. More particularly, small and medium-sized firms (SMEs) and their role in the internationalization process are gaining increasing attention by both academics and the business community. This is so because the fall in trade barriers over the last few decades, the increasing importance for the world’s economies of innovation and new technology, and the general expansion in globalization have meant a growing role of SMEs in international markets. While there has been research on the applicability of international models to SMEs, they are decidedly limited. Yet, the internationalization process of SMEs has paramount importance for economic development, especially in smaller economies where local markets cannot by themselves sustain growth. Continued economic expansion in these economies requires their SME population to successfully enter into foreign markets.

Recent investigations that do exist have in particular examined the rise within, and internationalization of SMEs from, a growing range of Asian and eastern European countries. With respect to the situation in eastern Europe, we observe that, as the European Union (EU) has expanded and become more internally integrated, central and eastern European SMEs find themselves with greater access to international markets. Thus attention increasingly has been shifting to how these so-called transition economies— Hungary, Poland, the Czech Republic, the Baltic States, etc.—can effectively compete internationally with western Europe and the United States. The rise of entrepreneurial SMEs in Asia and eastern Europe, and their ability to generate value added by operating in the global arena, is seen as key to the eventual success of these countries.

Over the last three decades, several internationalization theories have evolved. Some have concentrated only on development of exports and on the steps prior to exports. For example, S. T. Cavusgil distinguished five steps or stages involved in the evolution of exporting activity of firms. These various other studies distinguish between “lower,” “middle,” and “higher” stages of export involvement.

Entry Modes

There have been studies that look at the reasons why SMEs increase the breadth and depth of their exporting activities. When barriers arise to internationalization, these investigations tend to focus on internal problems in a country, such as political instability, decaying infrastructure, and so forth. But beyond this more empirical focus are broader theories that see internationalization as advancing either in increments (staged) or “rapid leaps.” In the former case, rapid SME internationalization is assumed unlikely because of financial constraints, the lack of international market experience or information, cultural friction, and other factors. Thus the increment lists hold that SMEs will internationalize and create value for a country in an evolutionary manner, first undertaking the least complex forms of entry (e.g., exporting) and then evolving into more complicated types of market entry strategies—from the rather passive forms of contracting work (e.g., becoming part of an outsourcing network) to the more active entry modes of licensing, joint venturing, and merging and acquiring.

In 1970s and 1980s, a number of Scandinavian authors published articles on the internationalization process of SMEs that appears to support the increment list model. The so-called Upsala School of scholarship suggests sequential modes of entry into successive foreign markets with a progressive deepening of commitment to each market. In these theories, the initial lack of market-specific knowledge and the subsequent need for a gradual learning process are the main assumptions. These theories see firms starting their internationalization process in culturally and geographically close markets. This research focuses on the concept of “psychic distance” as an important factor involved with the gradual approach and examines factors related to the hindrances to the flow of information needed for SMEs to internationalize, such as language differences, differences in culture, political systems, level of education, or level of industrial development. Initial lack of market experience causes firms to be cautious and rather risk averse in their approach to committing resources. As they gradually learn to cope with a target market environment, the perceived threats are reduced and commitment, including financial commitment, increases. Feedback from activities in each subsequent entry mode helps them to advance to the next level; from simple exporting to engaging in wholly owned subsidiaries.

Sharply contradicting these staged-based theories are studies that argue that firms in high-tech industries often have to be global as soon as they enter the foreign market (the so-called born-global model) and that the concept of incremental development does not hold when a firm’s owner manager has accumulated market knowledge even before the establishment of the current firm or when demand is inherently global.

It is not clear the extent to which internationalization, once started, continues unabated within a firm or country. There is increasing evidence that the internationalization process contains within it the seeds of its own destruction—or at the least curtailment. Recent studies suggest that, in certain contexts, inward-outward linkages that may initiate the internationalization process can, at a certain point, hinder as well as propel outward international expansion. This has broad implications related to the rate and direction of SME internationalization and, in turn, the ability of an industry to create and capture value added, that is essential in future economic growth.

Bibliography:

J. Buckley and P. Ghauri, The Internationalization of the Firm (Academic Press, 1993);
T. Cavusgil, “On the Internationalization Process of Firms,” European Research (v.8/6, 1980);
Mary Han, “Developing Social Capital to Achieve Superior Internationalization: A Conceptual Model,” Journal of International Entrepreneurship (v.4/2–3, 2006);
John S. Hill, International Business: Managing Globalization (Sage, 2009);
Elizabeth Maitland, Elizabeth L. Rose, and Stephen Nicholas, “How Firms Grow: Clustering As a Dynamic Model of Internationalization,” Journal of International Business Studies (v.36/4, 2005);
Melin, “Internationalization as a Strategic Process,” Strategic Management Journal (v.13, 1992);
I. Millington and B.T. Bayliss, “The Process of Internationalisation: UK Companies in the EC,” Management International Review (v.30/2, 1990);
Janet Morrison, International Business: Challenges in a Changing World (Palgrave Macmillan, 2009);
A. Nordstrom, “The Internationalization Process of the Firm: Searching for New Patterns and Explanations,” Ph.D. diss. (Stockholm School of Economics, 1991);
R. Reuber and E. Fischer, “The Influence of the Management Team’s International Experience on the Internationalization Behaviors of SMEs,” Journal of International Business Studies (v.4, 1997);
Sullivan and A. Bauerschmidt, “Incremental Internationalization: A Test of Johanson and Vahlne’s Thesis,” Management International Review (v.30/1, 1990);
W. Turnbull, “A Challenge to the Stage Theory of the Internationalization Process,” in Managing Export Entry and Expansion, P. J. Rosson and S. D. Reid, eds. (Praeger, 1987);
S. Welch and R. Loustarinen, “Internationalization: Evolution of a Concept,” Journal of General Management (v.2, 1988).

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