As markets turn global at an increasingly fast pace, internalization continues to attract widespread attention from scholars and practitioners as one of the most viable strategies for firms to realize competitiveness and sustainable growth (Zeng et al. 2012). The advent of the knowledge economy era and emerging information and communication technologies have served to stimulate the integration of the globalized economy, leading many businesses to adopt the objective of international competitiveness (Deng 2009). However, the decision to venture into international markets entails the assessment of entry motivations as well as alternative entry channels, bearing in mind the level of risk involved and the appropriateness of the business environment in a prospective host country or region (Harrison 2010). Failure to conduct this assessment may lead to adverse business outcomes, as witnessed by the high number of firms that have been unable to successfully internationalize despite making heavy investments (Ojili 2016). In this light, the present paper uses case examples to undertake a critical discussion of how and why firms expand into international markets.
Mode of Entry (The How Question)
Firms are obliged to work out the most appropriate international entry strategy based on factors such as the number of resources the business intends to commit to the expansion, the competitive environment characterizing the various markets of interest, the level of organizational development, and the extent to which the business wishes to be operationally involved (Deng 2009). Research is consistent that firms wishing to internationalize may adopt a number of entry modes, each with its own advantages and disadvantages (Ojili 2016). These modes of entry to international markets are discussed as follows:
Direct and Indirect Exporting and Importing
For many firms, this entry mode represents the most uncomplicated way to take advantage of international markets and resources as it involves direct contact between the exporter or importer and the international customer or supplier, hence ensuring that businesses benefit from low initial investment costs as they do not need to set up operational facilities in foreign markets (Harrison 2010). Indirect exporting or importing entails the use of a third party with the view to providing expert knowledge and a conducive and more expedient way for a firm to engage in international trade.
Ojili (2016, p. 210) acknowledges that the “export entry mode should be adopted when the cost of trade barriers is very minimal and when customization of the products or services are not critical.” Big oil corporations in OPEC countries, for example, adopt this internalization strategy upon the realization that locating operations in their home countries has an overall competitive advantage in terms of efficiency, cost reduction, and other considerations. However, some of the disadvantages of this mode of entry include high trade barriers, exorbitant transportation costs, and inability to respond to customer queries due to lack of a physical presence in the market (Ojili 2016).
Licensing and Franchising
According to Deng (2009, p. 304), “licensing and franchising are contractual arrangements whereby a licenser or franchiser allows a licensee or franchisee to use its intellectual property in return for a fee or royalty and, in some cases, an initial payment.” In this entry mode, it is important to note that the franchiser and the franchisee are two independent entities that are only bound together by a contractual agreement that runs for a particular period of time. As posited by Ojili (2016, p. 2010), the “licensing strategy should be adopted when the product or service is coded or packaged in such a way that makes copying difficult.”
Overall, this strategy allows the licenser or franchiser to use the country-specific knowledge and expertise of the licensee or franchisee to internationalize, establish and run its business operations in a comparatively low-risk but untried territory (Harrison 2010). Coca Cola has successfully used this entry mode to license its bottling operations to independent entities in its international markets. This way, Coca Cola benefits from the low initial investment, access to local knowledge and protection from trade barriers in host countries; however, the global soft drinks company exposes itself to image and reputation problems as it is often difficult to control the operations of its licensees operating in foreign markets (Ojili 2016).
Firms may decide to internationalize by entering into an agreement with other firms involving joint equity ownership and control, particularly in situations where full ownership may be considered too risky or is not permitted in the host country (Ojili 2016). Foreign multinationals such as Volkswagen have used this entry strategy to partner with local companies with the view to capturing the rising opportunities in emerging markets, whereby they typically provide advanced technologies and managerial experience while local companies provide knowledge about customers and address issues of government regulations in the host market (Jin, Zhou & Wang 2016). In such a relationship, two or more companies retain their separate legal identity but cooperate in exploiting the existing resources and capabilities with the view to achieving profitability and competitiveness in a particular market.
Available international business scholarship demonstrates that multinational firms may decide to internationalize by making inbound FDI with the view to taking over or purchasing performing or non-performing local firms (Slangen 2013). This entry strategy ensures that the firm has full ownership over its foreign subsidiaries, meaning that it will have significant control over its international operations and also have its technology and managerial expertise (Ojili 2016). Global cement manufacturer CEMEX, for example, uses the acquisition strategy to internationalize, often by purchasing inefficient cement firms in host countries and turning them to profitability and competitiveness by transferring its skills and expertise in customer service, marketing dynamics, information and communication technology, as well as production management to the acquired entities. A firm should adopt this international entry strategy when it is certain that “there is a substantial synergy between it and the firm it intends to acquire and it possesses the capacity to effectively absorb the company it intends to acquire” (Ojili 2016, p. 211). For example, Wal-Mart adopted the acquisition entry mode when internationalizing into Canada not only because the target market was mature enough to permit corporate control, but also due to the availability of an eye-catching and willing seller in Woolco.
Lastly, firms may decide to internationalize by using FDI to set up new ventures in host countries, commonly referred to as greenfield investments. Firms that use this strategy not only eliminate the risk of overpaying to acquire a local unit in the local market but also have full control of their operations and are able to avoid the problem of integration (Slangen 2013). Ojili (2016, p. 211) acknowledges that “a firm should pursue this strategy where there is a suitable target for acquisition; it has in-house expertise of the target market, and generally possess the required resources to survive in the target market.” Hyundai used this entry strategy to enter the Central Europe market by building a manufacturing plant worth €1.06 billion in the Czech Republic. Such a huge amount of capital demonstrates that the degree of risk and amount of commitment to the internationalizing firm is substantially higher compared to other entry options (Slangen 2013).
Internationalization Motivations (The Why Question)
The motivation of foreign direct investment (FDI) is based on a variety of reasons that are as diverse as the typologies of businesses that exist in contemporary times. By expanding across international markets, businesses may aim to gain access to new markets, protect export markets, pursue low cost, realize economies of scale and scope, disperse assets, utilize advanced technology and engage in learning opportunities, among other motives (Ojili 2016). In his study, Deng (2009, p. 302) uses earlier internalization models to demonstrate that “the major drivers motivating firms to invest in foreign countries are organized into four categories namely market-seeking FDI, resource-seeking FDI, efficiency-seeking FDI, and strategic assets-seeking FDI.”
Harrison (2010) provides a more nuanced perspective by arguing that the decision to venture abroad is fundamentally motivated by the firm’s mission and objectives; that is, its overarching aims and purpose and the exhaustive objectives it sets with the view to achieving the stated aims. In this respect, it is imperative that we adopt a more expanded scope when discussing the reasons why firms internationalize. Consequently, this paper will use the following categories in discussing why firms internationalize: Primary motives, the changing international environment, country-specific factors, and firm-specific factors (access to markets, access to resources, and cost reduction).
Most firms operating in the private sector venture into international markets in order to secure profit-making opportunities, increase business growth, gain an international reputation, and achieve competitive advantage (Harrison, Dalkiran & Elsey 2000). Part of the reason that made Wal-Mart adopt a vigorous internalization strategy was to increase its profit margins by selling its products in foreign markets, particularly against a backdrop of an increasingly saturated home market and slow market growth in the United States (Deng 2009). By expanding into numerous countries in Europe, Asia, and South America, Wal-Mart was able to achieve significant business growth and create an international brand name that is known the world over. Research is consistent that firms internationalize to gain competitiveness by reducing costs, increasing the scale of production, and allowing international procurement of components and services (Harrison, Dalkiran & Elsey 2000). Originating from a small home country in Switzerland, Nestlé has been able to achieve sustained growth and competitiveness because its internalization strategy has been effective in providing the firm with the needed economies of scale to increase its bottom line.
The Changing International Market
Another motivating factor that drives firms to internationalize is the shifting global environment, whereby the main players involved in international business activity (e.g., United States, Western Europe, Japan, and China) continue to enjoy relative peace and stability that is conducive for international trade and investment (Harrison, Dalkiran & Elsey 2000). Emerging markets in Africa and other regions previously considered as undeveloped or underdeveloped are attracting huge volumes of inbound FDI as firms in the developed world position themselves to increase their market share due to slow market growth and market saturation in home countries (Ojili 2016). The changing international environment has enabled the British telecommunications giant Vodacom to make enormous investments in many African countries with the view to increasing its bottom line by tapping into the huge potential for growth existing in most of these countries. The international growth and investment attracting firms to internationalize is also been maintained by an overall reduction in trade barriers between nations, courtesy of international trade bodies (GATT, WTO, etc) as well as the steady drop in national trade and investment policies (Harrison, Dalkiran & Elsey 2000).
Most firms venture into international markets due to factors such as political and economic stability of the host country, culture, and institutions in the host country, a country’s stock of created assets, supportive government policies, as well as the absence of unnecessary costs (Harrison, Dalkiran & Elsey 2000). While political and economic stability is foremost considerations for any firm wishing to transfer FDI to a host country, research is consistent that a country’s tangible assets (e.g., transport or communication infrastructure) and intangible assets (e.g., education and skills, technology, innovativeness, intellectual property, and business networks) are equally important in making the decision to internationalize (Williams et al. 2011). For example, many technology firms wishing to internalize have to consider the human capital, technology, and innovation levels of potential host countries before making the final decision. Before China opened up its economic landscape in the late 1970s, very few firms were wishing to expand their business operations and tap into the enormous Chinese potential due to unsupportive government policies (e.g., higher taxes for Western companies) and unnecessary costs (e.g., bureaucratic red tape and government-supported corruption).
Access to Markets
Research is consistent that many firms make the internationalization decision to (1) promote or exploit new markets, (2) ensure that their products and services are adapted to the tastes, needs, and trends existing on a particular market, (3) benefit from first-mover advantages, (4) ensure that they follow their competitors, (5) benefit from the incentives provided by foreign governments, and (6) address limitations in home markets, such as saturation and stiff competition (Harrison, Dalkiran & Elsey 2000; Williams et al. 2011). Coca Cola, for example, has been able to achieve a market leadership position in the sale and distribution of soft drinks due to its strategy of exploiting new and emerging markets. Tesco, on the other part, benefitted immensely from first-mover advantages through early entry into emerging economies of the former communist countries of Central and Eastern Europe in the late 1980s. Some firms have been able to not only follow the competition in their bid to access particular markets but also to displace their competitors in these markets. For example, Coca Cola’s aggressive expansion in Central and Eastern Europe after the collapse of communism in 1989 enabled the global soft drinks company to displace PepsiCo’s first-mover advantages in the region (Harrison, Dalkiran & Elsey 2000).
Access to Resources
Firms may make the internalization decision with the view to obtaining resources that may be at the core of their business. Other firms make the internalization decision to acquire resources at a lower comparative cost in situations where large quantities of resources are needed to move the business forward (Zeng et al. 2012). In other contexts, the needed resources may be nonexistent in the home country, prompting a firm to make the internalization decision with the view to accessing specialized resources that may be immobile. For example, companies that deal with minerals such as coal, iron ore, zinc, or copper may make the internalization decision in order to access these natural resources at a lower cost compared to transporting them to their home countries. In Africa, for example, multinational corporations are known to locate their headquarters in countries with a highly skilled but relatively immobile labor force, such as Kenya, Nigeria, and Ghana (Ojili 2016). Overall, however, access to resources is losing its relative importance as an internalization motivator because most firms have made the realization that highly transferable knowledge and technology are of greater significance than natural resources (Harrison, Dalkiran & Elsey 2000).
Available international business scholarship demonstrates that many firms make the internalization decision to (1) access low-cost materials, energy or labor, (2) benefit from financial incentives provided by host countries, and (3) avoid trade barriers (Harrison, Dalkiran & Elsey 2000). Here, it is important to note that the main banks and insurance companies in the United States and the United Kingdom have outsourced their call centers to developing countries that provide low-cost labor, such as India and Malaysia. Other firms have made the decision to relocate their production facilities to low-cost labor countries while retaining other core units such as R&D and management in their home countries.
Firms may also make the internalization decision to rationalize structures of established investments with the view to gaining from economies of scale and scope, risk diversification, and other elements of common governance (Ojili 2016). These companies, which are often experienced, large and diversified multinational corporations such as Unilever, Kraft Foods and Proctor & Gamble, are able to gain efficiency by drawing from variations of factor endowments in diverse countries. For example, these firms attain efficiency and cost reduction by ensuring that value-adding activities that are capital or technological intensive are located in developed countries, while those activities that are labor or resource-intensive are located in developing countries (Deng 2009). These firms also make internalization decisions to achieve economies of scale and scope, which in turn reduce their cost and enhance their operating efficiency.
This paper has used multiple case examples to critically discuss how and why firms make the decision to internationalize. The “how” question has been answered by exploring the modes of entry into international markets, which include direct and indirect exporting and importing, licensing and franchising, international joint venture, foreign acquisition, and greenfield ventures. The “why” question has been addressed by exploring the motivations behind making the decision to internationalize, which have been grouped into four main categories namely primary motives, the changing international environment, country-specific factors, and firm-specific factors (access to markets, access to resources, and cost reduction). The case examples provided in this paper serve to demonstrate that every mode of entry selected by a firm has its own advantages and disadvantages, hence the need to undertake a critical analysis of the business and competitive dynamics of the host country before making the decision to internationalize. Additionally, the case examples have served to illuminate how firms are motivated by different factors and dimensions to enter into international markets.
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