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Theoretical approaches

Economic Strategic Stream Behavioural Process- Oriented Stream Numerous theories and models can be placed within each of them Next we consider some of the most popular /best known and widely used theories and frameworks within these two streams Note that non of them has escaped criticism

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Theoretical approaches

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  1. EconomicStrategicStream • BehaviouralProcess-OrientedStream • Numeroustheories and modelscanbeplacedwithineach of them • Next we consider some of the most popular /best known and widely used theories and frameworks within these two streams • Note that non of them has escaped criticism • However,it is advisable &can be usefull for practioners and researchers to know their origin,developments and fields of use/applications. Theoreticalapproaches

  2. The economic-strategic approaches put strong emphasis on rational decision-making • Market Imperfection – Causes Hymer 1960,1967 and later tested by others: Kindleberger (1969), Geubwr, Mehta and Vernon (1967). • The above scholars challenged the then dominant view of international trade :(Hecher-Olin theory was dominant at the time, based on the assumption of competitive markets and did not consider the micro-level actors.) • Internationalization was seen as derived from country-level comparative adv. • Hymerfocussed on the firm when trying to explain why foreign firms internationalize & become MNCs • According to Hymer the MNCs demonstrated that competition is often imperfect. The firm becomes MNC when it possess an advantage(s)which gives it a monopolistic advantage that helps the firm to succeed abroad by using FDI to protect , control & fully benifet from the advts it owns. • Market Imperfection:results from... EconomicApproaches

  3. Market imperfctions that lead to FDI could be due to: • Imperfection in product or factor markets, • Economies of scale and learning , • Possesion of certain intangales, • Control of distribution system, • Product differentation, • Politically created imprfections eg: subsidies,concessions,policy instruements that attract and/or discriminate. • Through their decisions/actions, MNCs themselves restructure the markets &the rules of the game. continued

  4. A modern variant of market imperfection theory is the resource-base view Edith Penrose(1959)(in Theory of the growth of the firm )proposed resources as important factor in the firm growth,(’firms are pools of intangible resources’) Wernerfelt (1984)conceptual article's ‘A resource-based view of the firm’s analyzed from a resource perspective, the efficacy of sequential entry strategies for diversifying firm. Barney(1991)built his frame work on Penrose’s work. It suggested that ‘firms obtain sustained comp.advts by implementing strategies that exploit their internal strengths, through responding to environmental opportunities, while neutralising external threats and avoiding internal weaknesses’ These resources enable the firm to enjoy long term superior performance bec. they are :valuable, rare, imperfectly imitable ,and embedded in the organisation(vrio). The framework was based on two assumptions :firms are internally heterogeneous in terms of strategic resources they control, and resources are imperfectly mobile, thus allowing long-term firm heterogeneity Criticism? THE RESOURCE-BASED VIEW

  5. Transactioncost and Internalizationtheories Williamson 1979, 1985 Teece 1986 Buckley and Casson 1976, 1981 Hennart 1982 • What is transactioncost? Whyittakesplace? EconomicApproaches - continued

  6. TransactioncostsModel

  7. Rivalistic and Strategic Behaviour Ghoshal 1987, Porter 1986, Prahalad and Doz 1987, Hill et al, 1990, Yip 1989 The Eclectic Framework (Dunning 1981, 1988, 2001 ) John Dunning has over thirty years developed what is known as the Eclectic Paradiam(Framework ) which synthesizes the varaious strands of other theories within the economic-strategic stream. Eclectic,represent the idea that a full explanation of the international activities needs to draw on several strands of economic theory. Dunning proposes that the propensity of the firm to engage in inter.production increases if the following three conditions are satisfied: 1.Ownership advantages 2.Location advantages 3.Internalization advantages These also constitute the three sets of factors that are considered necessary in order to explain the choice of foreign operation methods,rangaing from exports to FDI. They are: Ownership(O)factors,Location (L)factors,and Internalization (I)factors.OLI acronym. -The paradigm encompasses: market imperfection and resource-based theory (the O factor),international trade and location theory(the L factor) and the transaction cost theory(the I factor) EconomicApproaches - continued

  8. Largegrowthsince 1980 • Unevendistribution • Most FDI hasbeenearlierbetween OCED countries • Developingcountries – esp. China and India – arenowpopularlocations. Reasons:? • SomeAfrican and Latin American countrieshaverecentlyemerged as importantlocations. Reasons:? • Sincemid 1990s Eastern Europe FDI: Patterns and trends

  9. After WWII, the US was the majorsource. Reasons:? The UK, France, Holland, Germany and Japan havebecomesince the 1960 importantsource China has recently become another major source: Reasons:? Somedevelopingcountrieshavealsoappeared on the FDI stage. Examples: India, United Arab Emerates,Qatar. Sources of FDI

  10. Threedecisions: • Where? Hostlocation • How? Entrymode and combinations • Howmuch? Value of investment and associated risks and control. • Abovedecisionsare made in the face of hugeuncertainty • Uncertaintyarisedue to variousaspects of ”distance” The fdidecision and influences

  11. Recently, the internationalization of industrial firms has been explained through networks and relationships between firms Firms intermationalize because other firms in their national network internationalize The firms within the network are dependent on each other and their activities therefore need to be co-ordinated These networks are stable or are changing, but the transactions take place within the framework of these established relationships A basic assumption is that the firm is dependent on external resources controlled by other firms in its network. Thus it has to work for international integration The business networkapproach

  12. An example of international network

  13. VIEW INTERNATIONALIZATION DECISIONS THROUGHTHE LENSES OF LIMITED RATIONALITY AND ORGANAZITIONAL LEARNIG PROCESSES TAKE A MORE HOLISTIC APPROACH. DEVELOPED A GRADUAL AND INCREMENTAL VIEW. THE UPPSALA MODEL: JOHANSON AND WIEDERSEIM-PAUL(1975) EXAMINED THE INTERNATIONALIZATION OF FOUR SWEDISH FIRMS.THEY FOUND A REGULAR PROCESS OF GRADUAL AND INCREMENTAL CHANGE: 1.NO REGULAR EXPORT 2.EXPORTS VIA AGENTS 3.SALES SUBSIDIARY 4.PRODUCTION IN FOREIGN MARKETS INTERNATIONALIZATION ATTITUDE ARE THE BASES FOR THE DECISION TO ENGAGING IN FOREIGN ACTIVITIES ,AND INTERNATIONAL ACTIVETIES INFLUENCE THESE ATTITUDES THUS THE PROCESS IS AN INTERACTION BETWEEN ATTITUDE AND ACTUAL BEHAVIOUR. THE SEQUANCE OF STAGES IS CALLED THE ESTABLISHMENT CHAIN. HOWEVER IT IS DIFFICULT TO HAVE A CLEAR DEMARCATION BETWEEN THE FOUR STAGES. BehaviouralApproaches

  14. THE CONCEPT OF PSYCHIC DISTANCR IS INTRODUCED TO EXPAIN THE SEQUENCE OF ACTIVITIES(DEFINED AS FACTORS PREVENTING OR DISTURBING THE FLOWS OF INFO BETWEEN FIRMS AND MARKETS:LANGUAGE,CULTURE ,ECON.AND POLITICAL SYSTEMS,LEVEL OF INDUSTRAIL DEVELOPMENT) JOHANSON AND VAHLNE (1977),EXAMINED THE INTERNALIZATION PROCESS FURTHER BY INVESTIGATING THE DEVELOPMENT OF KNOWLEDGE AND THE BUILDING OF A COMMITMENT WITHIN THE FIRM TO FOREIGN MARKETS. CONFIRMED TWO ASPECTS.:RESOURCE COMMITMENT TO FOREIGN MARKETS (MARKET COMMITMENT ) AND KNOELEDGE ABOUT FOREIGN MARKETS POSSESSED BY THE FIRM AT A PARTICULAR TIME ARE THE MOST IMPORTANT FACTORS MARKET K. COMMITMENT DECISION MARKET C CURRENT ACTIVITIES THE HSE HOLISTIC MODEL What is meantbyHolistic ? Itcombines the dynamicproduct, operation and marketpatterns into holisticpom-pattern with differentstages: 1.Starting 2. Development 3. Growth 4. Mature Seefig 4, luostarinen wider pub. 1994 and 1974:182 BehaviouralApproaches

  15. The POM-pattern includes Inward Stage, Outward Stage and Cooperation Stage (fig 6, Wider Pub. 1994) Recently it incorporate the De-internationalization and Re-internationalization strategies ReijoLuostarinenwholistic stages pattern model (a separate lecture will be devoted)

  16. The powerfield of internationalization

  17. DIMeNsIONS OF INTERNATIONALIZATION

  18. TWO EXTREME PATHWAYS OF INTERNATIONALIZATION

  19. Incremental (organic) approach

  20. BORN GLOBALS

  21. TraditionalGlobalinternationalizersInternationals BORN GLOBALS Internationalization/globalizationapproaches Domesticphase International phase Globalphase

  22. Definitions of bornglobals

  23. International entrepreneurship is a combination of innovative, proactive, and risk-seekingbehaviourthatcrosses national boundaries. Perhaptsbecause the seminalworks (Knight/Cavusgil 1996) originatedfrom the US, the original definition of 25% exportsby the BG withinthreeyears of itsinceptionwas, as seenbyEuropeans, notverydemanding. Hence, Finnishauthorssuggestedthat at least 50% to besold in continentsexternal to the onewhich the firmoriginatesfrom to qualify as a BG (Luostarinen/Gabrielsson 2004) Bornglobals: Selectedpreviousdefinitions

  24. Given the factthatBGsareled byentrepreneursand theirfirmsare international,whatelsecanwesay to definethemspecifically? Theseare the increasinglyglobalnature of demandin somemarketsegments Market potentialmaybeunequallybalancedbetweenbdifferentcontinents. What is important is that the BornGlobalfirm is targetingworldwide the key country markets in whichpotentialexists Products have to bethose with distinctdifferentiation: uniquetechnologyand/orsuperior design oruniqueproduct / service, orknow-how, systemsorotherhighlyspecializedcompetence. Bornglobals: furtherrefinements

  25. Global vision at inceptionin order to drivetowardglobalsuccess. Mustcarry the risks of a smallstart-upcompany; itcannotbe a spin-offfrom a largerfirmthat is prepared to help itfloat. Furthermore, itshouldbenotedthat the industriestheyemanatefrommaybewhatareconventionallytermedhigh-teche.g. wirelessorlow-teche.g. clothing. Weshouldbesomewqhatflexibleabout the numericalinternationalizationrequirementwithina threeyeartimeperiod of itsinception.

  26. Company Product FoundedIntern’zation% Glob’zation% EnvironicsGasdetection 1987 75% 65% systems Stonesoft IT security 1990 100% 60% solutions VaconFrequency 1993 82% 41% conventers BiohitHospital and laboratoryeq. 1988 96% 28% Selectedexamples of bornglobals/borninternationals

  27. Bornglobalsversustraditionalinternatonalizers Speed of growth High low E a r l y L a t e

  28. Broad productportfoliosarenotpossible - New to the world, nichesegment - Focusedproductportfolios - Advanced products (services and systems) early on • Traditionalstagesmodelnot to betaken as normativeguideline - Speed is vital whernespablishing business operations - Operation stages progressed faster or some stages jumped over - Co-operative operation modes at an early stage (R&D, Marketing) • Stepwisemarketentrytooslow - Country marketexpansion is rapid - Still Europe comesfirst - But American or Asian marketsenteredwithin 1st to 4th year Globalizationstrategiesdiffer

  29. Small companies with smallmarkets and with limitedfinancial and managerialresourceshave to globalise the firm and to doitsoon and fast? • General managerialchallenges • Research and developmentchallenges • Financial challenges • Other Specificchallenges of bornglobals

  30. Young age of BornGlobals and theirfounders • Young ageof founders, managers and personnel of BornGlobals • Difficulties to hireexperiencedtop managers • Need for strategicglobalisationknowledge and globalmarketingknowledge is exceptionallyhighalready at the time of the establishment • Planning for global business maybeneglected and earninglogics and business portfioliosnorproperlyconsidered (Lack of focus and sufficientrevenueflows) • Product, operation and marketselections for globel business and price, distribution, customer and promotiondecisionsmaybewrong and causelosses for the BornGlobals • Problem of trust and creditabilityin the eyes of differentpotentialvaluechain and networkpartners and financialinstitutions. General managerialchallenges for BG’s

  31. Weakavailability of money for BornGlobalsfromventure capital firmsand othersimilarsources • Non-availability of money for service, knowhow and systemBornGlobalsfrombanks and othersimilarsources • Unpreparedness of BornGlobals to the fiercefullychangingsituationin capital markets • Weakornonexistentrevenueflowsin BornGlobalsdue to the heavy and long-term R&D investments and ”delayed” sales and marketingplans • Drasticallycutinvestments and purchases in customerfirms and use of below-costpenetrationpricingfor getting the firstreferencecustomerdeal. Specificresearch and developmentchallenges for BGs

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