Managing the Internationalization process

The Internationalization Process Timing of market entry

Early entry into a foreign market can have five generic advantages Cost advantages (e.g., allowing the firm to have larger economies of scale and accumulating experience about the foreign market before the entry of competitors). Pre-emption of geographic space (e.g., pre-empting competitors by securing a specific geographic space or marketing channel).
Technological advantages (e.g., adapting products and processes to the local market and implementing new innovations before competitors enter the market). Differentiation advantages (e.g., higher switching costs for buyers or reputational advantages of established brands).

Obstacles to internationalization
Liability of foreignness. The difficulties as a result of the different norms and rules that constrain human behaviour, including culture, language, religion, and politics; companies may lack the knowledge and social networks to understand the different norms and rules of how to operate successfully in a foreign country Liability of expansion. The difficulties as a result of an increase in the scale of a firms activities; domestic companies may also face problems of increased transportation, communication, and coordination as a result of expansion but these problems are usually greater for multinational firms because of the high costs of coordinating international operations . Liability of smallness. The difficulties as a result of small company size; in particular, small and medium-sized enterprises (SMEs) may have fewer financial resources for foreign investments, limited information about the characteristics of foreign markets, a lack of human resources to conduct relevant business development work, and less negotiating leverage vis--vis potential business partners and foreign governments Liability of newness. The difficulties as a result of being new to a market; new domestic market entrants also suffer disadvantages compared with established firms but these problems are larger for internationalizing firms because they lack experience of foreign transactions or lack certain resources needed in foreign markets

Perceptions of managers
Subjective perceptions of managers about foreign markets are often the key reasons why companies decide to expand internationally in a certain direction. Managerslike any other human beingstend to avoid unfamiliar situations compared with familiar ones. They do not like uncertainty and prefer to invest in markets they are familiar with rather than in unfamiliar markets High psychic distance (that is, subjective perceptions of large differences between countries) can discourage the firms international expansion into a given country because it generates uncertainties among business decisionmakers.. Factors which influence managerial perceptions of psychic distance include: geographical distance, language, religion, education levels, levels of industrial development, logistics infrastructure, political systems, legal systems, and government regulations, among others

The Uppsala Model

The Uppsala Model assumes that the more the firm knows about the foreign market, the lower the perceived market risk will be, and the higher the level of investment in that market. So, over time, and as firms gain foreign commercial experience and improve their knowledge of foreign markets, they tend to increase their foreign market commitment and venture into countries that are increasingly dissimilar to their own.

The Uppsala Model

The Uppsala Model suggests that firms proceed along the internationalization path in the form of logical steps, based on their gradual acquisition and use of information gathered from foreign markets and operations, which determine successively greater levels of market commitment

Market Knowledge

Leads to
Market Commitment

leads to more
Market Knowledge

Leads to more
Market Commitment

and so on

Entry mode strategies

When firms decide to enter a foreign market, they are faced with a large array of choices of entry mode, which could be grouped into five main categories: export, licensing, franchising, international joint venture, and wholly-owned operations.

Export
A simple definition of exporting is the action by the firm to send produced goods and services from the home country to other countries. Export is a frequently employed mode of internationalization and one of the simplest and most common approaches adopted mainly by small- and medium-sized firms in their endeavour to enter foreign markets. There are three different exporter categories according to firms level of export involvement: experimental involvement, where the firm initiates restricted export marketing activity; active involvement, where the firm systematically explores a range of export market opportunities; and committed involvement, where the firm allocates its resources on the basis of international marketing opportunities

Licensing
International licensing is the transfer of patented information and trademarks, information and know-how, including specifications, written documents, computer programs, and so forth,as well as information needed to sell a product or service, with respect to a physical territory Licensing does not mean duplicating the product in several countries. Most products going into foreign countries require some form of adaptation: labels and instructions must be translated; goods may require modification to conform with local laws and regulations; and marketing may have to be adjusted. Risks of licensing Sub-optimal choice. This risk is associated with the possibility of licensing being not the best possible choice and or selecting the wrong partner hence not realizing the full potential of the partnership. Risk of opportunism. The possibility that the licensee takes the opportunity to appropriate the technology or process that has been licensed to it and internalizes it.

Risks of licensing
Quality risks. These risks are associated with the possibility that some licensees might not be able or willing to maintain the quality of the product or service and hence compromise the reputation of the licensor. Production risks. These risks are related to the possibility that licensees will not produce in a timely manner, or will not produce the volume needed, or will overproduce. Payment risks. There are risks associated with licensees not being able to or decide not to pay for royalties. Contract enforcement risk. This risk is associated with licensors not being able to enforce the agreed contract. This usually occurs in emerging economies where there is weak infrastructure for commercial law enforcement.

International franchising
International franchising is a contract-based organizational structure for entering new markets (Teegen 2000: 498). It involves a franchisor firm that undertakes to transfer a business concept that it has developed, with corresponding operational guidelines, to non-domestic parties. once the potential franchisor has established a reputation for its business concept, this develops demand as a leasable commodity. The franchisor packages the business concept, operational guidelines and access to its trade and brand marks, and offers this business format to firms, who purchase the rights to exploit commercially the concept and trade names for a given period of time (typically between five and fifteen years) in a given geographical territory. Typical franchise contracts require an upfront payment to the franchisor as well as royalty payments based upon sales in the stipulated territory.

Risks of international franchising

The master franchiser may not follow the directives of the franchisor. Franchisers may not understand the fundamental concept of the franchisor and as a result may communicate the wrong concept to the franchisees. The fact that franchisers are responsible for improving the quality of the product, policing outlet quality, and promoting the brand may increase the potential for franchisees to free ride, in the belief that the franchisers efforts are sufficient for the franchise to succeed. This can result in franchisees attempting to increase profits by reducing the quality of inputs (e.g., by under-staffing). A franchise may damage the franchisers image and reputation in the host country, because customers often cannot distinguish between franchised and company-owned outlets: a poor experience in one franchise outlet may hurt the reputation of the entire chain.

Joint venture
There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships. Such alliances often are favourable when: The partners' strategic goals converge while their competitive goals diverge The partners' size, market power, and resources are small compared to the Industry leaders Partners are able to learn from one another while limiting access to their own proprietary skills

Wholly Owned Ventures

Multinational firms have two options: Greenfield investment in a completely new facility-, or acquire or merge with an already established local firm. A greenfield strategy entails building an entirely new subsidiary in a foreign country from scratch to enable foreign sale and or production. An international merger or acquisition is a transaction that combines two companies from different countries to establish a new legal entity.

Greenfield strategy
Risks:
The risk of building relationships with customers, suppliers and government officials in the new country. The risk of recruiting managers and employees familiar with local market conditions.

The risk of being seen as a foreign firm by local stakeholders.

Mergers and Acquisitions (M&As)

Types of M&As:

Horizontal M&As: involve two competing firms in the same industry Vertical M&As : involve a merger between firms in the supply chain.
Risks:

Corporate and national cultures fit Managers of the acquired foreign subsidiary may not accept the parent company