Thursday, Oct. 19th

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Thursday, Oct. 19th

• International Theories

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Why go international?

• Economy-based explanations
• International product life-cycle theory
• OLI theory
• Management-based explanations
• The behavioral approach
• The strategic approach

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International Product Life-Cycle Theory

• Developed by Vernon in the 1960s
• Explains the rise of the American MNC
• Basic principles
• New products are created by firms in
  technologically advanced countries where
  marketing segments of clients with strong buying
  power exist
• These firms begin exporting to less-developed
  zones with high prices, to absorb initial costs
• In maturity phase, the technology becomes
  standardized and the monopoly advantage of the
  firm disappears
• The firm decides to relocate production to
  countries where labor costs are lower

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Product Life-Cycle
Sales
Goal extend the life cycle as long as possible
Time
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International Product Life-Cycle
1st phase - Launch/Growth 2nd phase - Maturity 3rd phase - Decline
Key variable in marketing mix
Factor explaining internationalization phase Technological advantage Competitors in foreign markets Search for least expensive sources of supply
Internationalization phase Export Production abroad Production abroad, export to domestic market
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Limits to this theory

• This cycle has not been observed in all parts of
  the world
• Innovation is spread throughout the world much
  more quickly today
• There are more and more new products competing on
  most markets
• International product life cycles have
  accelerated substantially
• Simultaneous product launches
• Pricing strategy has changed

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OLI Theory

• Developed by Dunning in the 1980s
• The eclectic paradigm of internationalization
• Explains the choice FDI over exporting
• A firm will directly invest in a foreign market
  if three conditions are fulfilled
• Ownership advantages (technology, patents,
  know-how, government protection, intangible
  assets and specific assets)
• Location advantages (economic conditions of
  producing and selling in a foreign market are
  important natural resources, infrastructure,
  energy, labor costs, etc)
• Internalization advantages (if transaction costs
  gt organizational costs, the firm tends to
  internalize through FDI)

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OLI Theory
INTERNATIONAL STRATEGY
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Limits to this theory

• Only compares FDI and exporting
• Considered to be somewhat simplistic
• Does not take into account human and cultural
  factors
• Does not apply to service firms, only industrial
  firms
• Recent entry modes (such as franchising or
  licensing) give different results

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The Behavioral Approach

• Research related to HR management
• Underscores the importance of managers in the
  internationalization process
• The managers behavior (or his decision-making
  process) is directly related to the
  internationalization process of the firm
• Stronger relationship in SMB

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Relationships found by the behavioral approach

• First firms to internationalize are run by
  risk-taking managers (vs. risk-averse)
• FDI will be the natural, spontaneous choice
  because headquarter management naturally prefers
  keeping control over international activities
• Market choice is subjective (education,
  creativity, open-mindeness, study abroad)

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The Strategic Approach

• Internationalization can allow a firm to meet
  general business goals
• It allows a firm to modify current competitive
  position
• It will cause management problems (organizational
  structure, managing a multi-cultural team,
  control procedures, etc)
• It requires specific techniques, such as
  international marketing, to overcome these
  problems

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The Strategic ApproachDetermining Factors of
Internationalization

• Commercial Factors
• Market saturation and/or size
• Degree of specialization
• Seasonal sales
• Industrial Factors
• Search for leverage
• Search for scale economies
• Reduced labor costs

• Environmental Factors
• Open markets and free-trade agreements
• Converging tastes/preferences
• Government aid
• Opportunity Factors
• Spontaneous meeting (trade fairs, word-of-mouth)
• Production surplus
• Management motivation

Comprehensive, global approach to explaining
internationalization
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Major Internationalization Motivations of Small
and Medium-Sized Firms

• PROACTIVE
• Profit advantage
• Unique products
• Technological advantage
• Exclusive information
• Managerial urge
• Tax benefit
• Economies of scale

• REACTIVE
• Competitive pressures
• Overproduction
• Declining domestic sales
• Excess capacity
• Saturated domestic market
• Proximity to customers and ports

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The Internationalization Process

• There are 3 essential characteristics of
  internationalization
• Internationalization is universal
• Internationalization is heterogeneous
• Internationalization is sequential

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Internationalization is universal

• In terms of geographic zones (country of origin
  and host country)
• In terms of firm size (small firms and MNCs)
• However
• Concentration of large firms about 250 French
  firms account for 50 of international trade,
  30,000 account for 95...
• But,
• more and more SMB are entering the international
  arena thanks to new technologies
• The export rate (export sales/domestic sales) or
  degree of internationalization is considered
  independent of firm size, so international
  commitment is as strong for small international
  firms as for large international firms

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Internationalization is heterogeneous

• In terms of entry modes
• In terms of internationalization vectors
• Country/market
• Market segments
• Products/services
• In terms of business functions
• International sales (exporting, selling abroad)
• International sourcing/procurement (buying
  abroad)
• International production (manufacturing abroad)

Simple market expansion to total diversification
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Internationalization is sequential

• It is sequential in time
• Learning process (Uppsala Model of
  Internationalization)
• Scandinavian Stages Model of Internationalization
• It is sequential in space
• Concentric expansion
• Distance

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The Uppsala Model of Internationalization

• The firm is a learning organization
• Internationalization is a series of steps in a
  learning process (learning about international
  environment and activities)
• The greater a firms international experience,
  the greater its commitment to foreign markets
• Knowledge and experience are directly related to
  the firms growing commitment
• Internationalization is not spontaneous, it is
  the gradual result of successive decisions
  (evolutionary development of the firm)

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Internationalization and distance

• ___________ distance
• __________ distance
• ___________ distance

CONCENTRIC EXPANSION
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Concentric Expansion
Cold countries
Hot countries