Means Of Internationalization For Foreign Markets – Discussion And Strategies

Reasons for Internationalization

Discuss about the Means of Internationalization for Foreign Markets.

The internationalization is the process of increasing the association of business entities with the foreign markets. The international business has existed for thousands of years with exports and imports of the local products. However, in the past several business enterprises have opted to enter into other countries to expand their market, compensating the local market decline, reducing operational and distribution costs and distributing risks. It has increased the number of multinational firms across the globe and these firms contribute significantly to the local economy and provide employment to the people. Previously, internationalization was considered as a phenomenon of the Western enterprises and the companies originating from the triad of the USA, Europe and Japan expanding their business in the international markets (IESE, 2015).

However, the contemporary multinational firms are originating from China, India, South Korea, Brazil and Russia. It shows the transformation in the current business scenario. There are several theoretical paradigms used to explain the internationalization of the firms. In the resource-based view, the companies elect the internationalization strategy as they have numerous resources awarded by their home economy. The companies use the internationalization strategy to get better opportunities and create competitive advantages for themselves. These resources can be intangible or tangible and may have a time window. Sometimes, these resources may prove disadvantageous for the business organization. These disadvantages can be associated with the country or the firm wherein the business enterprise is operating. The companies may expand to overcome these disadvantages and gain competitive advantage through the acquisition of the new assets. The business organizations try hard to attain beneficial resources as they are hard to replace (Marinov and Marinova, 2011). In this essence, in this paper, the various means of internationalization selected by the business organizations is discussed. Along with it, the internationalization models are also described in the paper.

The most common type of internationalization trade strategies are exporting, importing and countertrade. A business organization usually prefers internationalization by exports as it is the most common strategy for expanding into the foreign markets. It is important for business organizations to select the internationalization strategy according to their business model and the basic motivation for internationalization. The motivation of the employees can be classified in two categories, namely, reactive and proactive. The reactive motivation occurs when the company follows its major customers or clients in the international markets. In contrast to it, the companies pursuing high growth markets in the foreign countries are motivated by proactive reasons. Other than that, a company may pursue internationalization to enhance its knowledge and learning. Although there are diverse motivations for the internationalization of the firms, the fundamental behind all is the growth of the company. The internationalization of a business organization begins with the recruitment of personnel, experienced in international markets or recruiting international employees. Along with it, an internationalization strategy is selected to pursue the foreign market goals. The technological advancements have also contributed to the internationalization of the business as the companies can communicate easily with the global clients (Marinov and Marinov, 2011).

Internationalization Strategies

The business organizations can manage the foreign subsidiaries easily by using the air travel and email networks. A number of companies pursue internationalization strategies to reduce their budget. Today, a large number of business enterprises outsource their business from the countries with a relatively low cost of living and expenditure. It reduces their overhead cost and increase profits. Other than that, by going global the companies may reduce their dependency on the local markets and can safeguard themselves from the fluctuations in the local market. For instance, the sudden decrease in the demand of the customers or increase in the market share due to arrival of competitors negatively impacts a firm’s business. A company can protect itself from the negative impact by venturing into the international markets. A greater market for the company means large profits. Moreover, the multinational business organizations also adapt their products and services to suit the local culture to achieve market penetration. Sometimes, the companies also focus on entering into the under-developed market to gain market share (Ebner, 2011).

The selection of the foreign market entry strategy is dependent upon the associated risk, control and the requirement of the resources. Moreover, different market entry strategy promises different returns on the financial investments. The market entry mode is differentiated in two modes, namely, non-equity mode and equity mode. In the non-equity mode, the companies use the strategy of export and contractual agreements. In the non-equity mode, the companies use the strategy of joint ventures and wholly owned subsidiary. The market entry strategy of export provides lowest level of risk and least market control. In contrast to it, the market entry strategy providing highest market control and expected return on investment are associated with acquisitions and Greenfield investments.

As discussed above, exporting is a popular foreign market entry due to limited risks, expenses and requirement of little knowledge of the foreign markets. In this strategy, the companies conduct al the production and the manufacturing in the local country and deliver it to the customers in the foreign market (Zou and Kim, 2009). The company can conduct its marketing, distribution and customer service activities in the foreign market itself or contract with an independent distributor for it. The strategy is preferred by the small and medium enterprises and first time entrants to the foreign markets. Exporting is a very flexible strategy to enter into the foreign markets. Compared to other strategies, in export the companies can easily withdraw from the foreign markets in case of low profits. The expenses and the risks associated with internationalization are very low (Haak, 2003). There are two types of exporting, namely, direct exporting and indirect exporting. In the direct exporting the business enterprise becomes directly involved in the marketing and advertising of the products. Contrary to it, in thee indirect exporting, the companies do not get involved in the marketing and distribution of the international products. 

Licensing in another foreign market entry strategy characterized with limited degree of risk. As per this strategy, the firms give license to the patents, trademarks and copyrights. Additionally, the firms also share knowledge regarding the business processes and the products. The licensor returns the investment by paying specific licensing fees. Several business organizations use this method as it promotes their products in the foreign territories. It is a common method adopted by the public authorities as it brings new skills and knowledge in their place (Twarowska and Kakol, 2013).

Franchising is also a similar concept to licensing. However, in this method, the business organizations are more directly involved in development and control of the promotion and advertising of the products. In this method, the franchisees pay specific fees and royalty to the franchiser to obtain the trademark of the company. The franchisee is a semi-independent business organization which is supported by the parent company in terms of technology and finances. The franchisee uses the trademark along with the business format and the technology. In comparison to the licensing, franchising builds a long-term relationship with the local organization. The set of resources and the rights provided by the organization are also broad in range, such as the franchisor provides equipments, training and finances. However, in franchising, the parent company is liable to provide knowledge of the business processes and necessary resources whereas in licensing, the agreement is made upon the intellectual property and trade secrets. There are several benefits of franchising mode of operations such as low political interference, low cost, option to simultaneously expand in different regions of the world and choice to select the partner according to their financial and managerial capability. However, several times, the franchisee may develop into the future competitors. Along with it, a wrong franchisee can tarnish the reputation of the parent company. When compared to the internationalization strategies of licensing and exporting, it requires heavy financial investment to manage the subsidiaries in the foreign companies.

A large number of business organizations prefer joint ventures due to their huge financial investments. It has several common characteristics with licensing. The companies utilizing joint ventures to enter into the foreign markets partake in management decisions ad hold a substantial amount of equity. The companies form a partnership which is called joint venture. In the joint ventures, the companies hold a substantial control over the local subsidiaries, its operations and provide the company with adequate local market knowledge. The parent organization can access the relationship network of the local company and expand its knowledge. Moreover, the firms are exposed to limited risk due to partnerships with the local companies. It is quite popular foreign market entry strategy as it avoids the control problems associated with other types of international ventures and the firm can acquire the local market knowledge from the local firm (Hewitt, 2005).

Another strategy to venture into the foreign market is creating strategic alliance. A strategic alliance encompasses various modes of international ventures, such as joint venture, shared venture or minority equity participation. The common characteristics of all these strategic alliance are they are developed in highly industrialized nations, they emphasis on product development and research rather than distributing them and the time duration for the strategic alliance is small in comparison to other joint ventures. One of the primary intents of the strategic alliance is the exchange of the technology for the research and development. The companies prefer creating strategic alliance for the research and innovation as there is hardly any firm possesses all the necessary resources to foster innovation. Moreover, the short product lifecycle and increases competition forces the company to remain competitive in the marketplace (Martínez-Fierro, 2006).

The internationalization of a business organization is characterized by excessive diversity and its systematization. Therefore, the systematic internationalization of a business organization can be described through several models of internationalization. All the models of internationalization can be classified in three categories, namely, progressive, contingency and interactive model. The progressive model considers internationalization as a progressive process wherein a firm attains internationalization through several stages. The Uppsala model is a common model which is categorized into the progressive model of internationalization. In this model, the internationalization is considered as a process of learning and attaining knowledge. According to this model, the major hurdle in the internationalization of the business organizations is the lack of knowledge of the local markets and how to operate internationally. A business organization tends to learn from its international activities and knowledge can be acquired in relation to the international market. Therefore, the relative hurdles in the internationalization procedure are reduced with the acquisition of knowledge (Cavusgil and Knoght, 2009). As per this model, the companies having considerable resources can jump one of these stages and achieve internationalization in a quicker pace. Therefore, the model suggests that there are some organizations which are born global and can attain access to the global markets without having considerable knowledge. Similarly, the knowledge acquisition of the foreign markets is not significant when the conditions in the foreign market are not stable. Also, if the foreign markets are similar to the local markets, the company can enter the market without passing through all these phases (Andersson and Holm 2010).

The progressive or Uppsala internationalization model can be understood through the four stage, namely, intermittent export, export through independent representatives of the manufacturing company, foreign subsidiaries and manufacturing plants in the foreign markets. In the Uppsala progressive model, it is discussed that the companies obtain knowledge during the internationalization operations. This knowledge could be general or objective knowledge regarding the business environment or market-specific.  The market-specific knowledge is obtained only from the operations in the foreign country whereas the information related to the business operations could be transferred from one country to another.  The Uppsala model also states that the knowledge attained by a business organization relating to the market characteristics of a specific geographical location also influences its investment decisions (Frynas and Mellahi, 2015). If a business organization lacks knowledge regarding the international business operations, it will be reluctant it invests in it in long term. The companies having low knowledge encounter low risks in its business operations. The Uppsala model also elaborates that the companies select the target markets about which they have maximum knowledge. As most of the companies avoid risk and uncertainty, in the internationalization process they enter into the countries which are closest to them both psychologically and in geographical locations. Gaining knowledge of the foreign markets reduces the psychological distance between the countries and encourages the companies to enter into the foreign markets (Ciravegna, Fitzgerald and Kundu, 2013).

Another model to explain the internationalization process is thee contingency model of internationalization. In this model, there are three influencing factors in the internationalization process, namely, reasons for internationalization, environment and mode of entry factor. These factors are also called REM factors. The reasons for entry encompass the motives and the aims of a business organization to venture into the international markets. The motives of the company can be categorized into proactive or reactive reasons. The proactive reasons include increasing profitability, technical competence, reducing the operations cost, seeking opportunity in the foreign markets and accessing resources. Contrastingly, the reactive reasons include increased pressure in the domestic markets, saturation or stagnation in the domestic markets, overproduction or utilization of the excessive capabilities, proximity to the foreign companies (Wilson, Hooley and Loveridge, 2016). In REM factors, the E factor denotes the business environment. It has been discussed previously that the companies prefer to operate in the familiar markets. The distance between the markets could be geographical or psychological. The psychological distance could be due to differences in the economic prosperity of the domestic and foreign market, language barriers, cultural barriers, and differences in the education level of the countries. The selection of the mode of entry in the internationalization process is dependent on several factors. The major factors that influence the mode of entry are cost, investment profile of the country, political stability, and control over the market, future benefits and the associated risks in the foreign markets. The growth of the company in the international market is dependent upon the environmental factors in the foreign country. In the internationalization process, the environmental factors are dynamic and constantly changing. Therefore, there is specific internationalization method of business organizations. According to the contingency model, the environmental factors of a foreign county are unique and constantly changing. A business organization must adapt itself and use its strengths to make favourable conditions in the foreign market. In this model, firstly, some conditions are specified then if those conditions are fulfilled they are followed by an action plan. The transaction cost model is based on this approach (Kaynak, 2014).

The interactive model of internationalization posits that a business organization enters into the international markets when it forms long term relationships with the local actors. The relationships are formed by the continuous interaction between different actors. According to this model, business networks are formed when a number of commercial and personal relationships are developed between its members. According to this model, the major motivator for a company to expand its operations in international market is organization networks (Larimo and Vissak, 2009). The business organizations in the network are co-dependent on another and utilize the resources of each company for the benefits of both the parties. The needs and the capacities of the business organizations are mediated by the interactions in these relationships. In this model, the most critical factor in the internationalization of business organizations is the relative position of the business in the network. A business enterprise is assisted by its business network in internationalization by one of the following strategies, namely, extension, penetration and coordination. In the extension strategy, a company extends in the foreign markets wherein it has previously developed relationships and networks. In the penetration strategy, the company ventures into an international market to deepen its relationship with other companies in the local market. In the coordination, a business organization advances its existing relationships in different markets. According to this model, a multinational enterprise fall into one of the following category, namely, the early starter, the late starter, the lonely international and the international among others. The companies which do not have a business relationship with the foreign companies are defined as the early starters. These companies are forerunner and builds relationships with the companies in the foreign markets. The lonely international companies are the business organizations which has a limited amount of relationships with the companies in the foreign countries. However, the competitors and the customers of these companies are less internationalized. With internationalization, these companies deepen their existing relationships with the foreign countries. The late starters companies are the companies which remain locally focussed even when the other companies in the network are developing markets in the foreign countries. The late starters companies find difficulties in finding available partners in the foreign countries and establishing relationships with them. The international among others are the companies which uses their position to bridge the gap to other networks and foreign markets (Danciu, 2012). 

Conclusion

Conclusively, it can be stated that in the present scenario, a large number of companies are pursuing the internationalization to expand their profitability and market share. The companies venture into the international markets by exports, joint ventures, strategic alliance, licensing or franchising. Among all these strategies, the export is the most common and popular strategy for international ventures as it requires less investment and has significantly less amount of risk. There are also several models that describe the process of internationalization in the business organizations. The Uppsala model is the most common model that states that internationalization is achieved by gaining knowledge of the foreign markets. Along with it, there are other models also such as contingency model and interactive model of internationalization. In the contingency model, some conditions are posited and when they are fulfilled, the company makes an action plan to venture into the foreign market. In the interactive model, internationalization is considered as a process of networking between different organizations.

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