Gm507 International Business and Management) Individual Assignment

GM507 International Business and Management January-April 2013
January-April 2013
Faculty of Business & Information Science
GM507 INTERNATIONAL BUSINESS AND MANAGEMENT ) Individual Assignment

Master in Business Administration (MBA)
Lecturer: Associate Professor Dr. Kwek Choon Ling(kwekcl@ucsi.edu.my)
DEADLINE FOR SUBMISSION: Week 10, Monday, 4th March
2013 Student ID: 1001129606 Student Name: Liu Yubing
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Table of Contents
Abstract Part A 1.0 Introduction 2.0 Definition of Internationalization 3.0 The history of Internationalization theories 3.1 International trade theory 3.1.1 Mercantilism (During the 1500s to the late 1700s); 3.1.2 Absolute cost advantage (Adam Smith, 1776) 3.1.3 Comparative cost advantage (David Ricardo, 1817) 3.1.4 Gravity model of trade (Walter Isard, 1954) 3.1.5 Heckscher-Ohlin model (Eli Heckscher, 1966 & Bertil Ohlin, 1952) 3.1.6 Leontief paradox (Wassily Leontief, 1954) 3.1.7 Linder hypothesis (Staffan Burenstam Linder, 1961) 3.1.8 Location theory 3.1.9 Market imperfection theory (Stephen Hymer, 1976 & Charles P. Kindleberger, 1969 & Richard E. Caves, 1971) 3.1.10 New Trade Theory 3.1.11 Specific factors model 3.2 Traditional approaches 3.2.1 Diamond model (Michael Porter) 3.2.2 Diffusion of innovations (Rogers, 1962) 3.2.3 Eclectic paradigm (John H. Dunning)
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3.2.4 Foreign direct investment theory 32.5 Monopolistic advantage theory (Stephen Hymer) 3.2.6 Non-availability approach (Irving B. Kravis, 1956) 3.2.7 Technology gap theory of trade (Posner) 3.2.8 Uppsala model 3.3 Further theories 3.3.1 Behavioural theory of the firm (Richard M. Cyert & James G. March, 1963; Yair Aharoni, 1966) 3.3.2 Contingency theory 3.3.3 Contract theory 3.3.4 Economy of scale 3.3.5 Internalisation theory (Peter J. Buckley & Mark Casson, 1976; Rugman, 1981) 3.3.6 Product life cycle theory (Raymond Vernon, 1966) 3.3.7 Transaction cost theory 3.3.8 Theory of the growth of the firm (Edith Penrose, 1959) 4.0 The evolution of Internalization theories Part B Analyze the theories What is international trade? Evolutionary Theory on Internationalization of SME How Globalization influences Internationalization ? A case study through The internationalization process of Chinese MNCs to explain some unperfect point of the internationalization practice.
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Internationalization theories cannot fully explain the phenomenon of current international business critically evaluate
Abstract
In this paper, the author in the manner of a kind of combining with internationalization theory and the practice, theory divided into two parts to critically evaluate why international can not be fully explain the current international commercial phenomenon.
In the first part, the author describes the various internationalization theories and models in the process of internationalization in detail and systematically explain some of the limitations of the theory in the practice of international trade. In the second part, the author hopes that through contact the relationship between internationalization theory and the current world trade status, to explain the gap between internationalization theory and its application.
Part A
1.0 Introduction
The research examines internationalization theories cannot fully explain the phenomenon of current international business. Most of the existing internationalization theories, which try to describe the internationalization process.Internationalization theory is the theory which researches and studied why International Trade Occurs , the trade interests and the Trade pattern change. Since Adam Simys famous
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book The wealth of nations publication in 1776, during the 200 years until now, international trade theory has experienced the classical trade theory, new classical trade theory, new trade theory and the new classical trade theory of four stages. Governments use these theories to design theirs policies and excepted benefits their countries industries and citizens. For the managers, they use them to identify hopefully markets and profitable internationalization strategies. (Ricky W. Griffin, Michael W. Pustay, 1988)
Notwithstanding, these theories describe the internationalization process in an adequate way, yet they have their weak points. Researchers tested and provoked them, especially the Uppsala Model of Johanson and Vahlne(Johanson & Vahlne 1977; 2003), but were seldom able to replace them. Often researchers come up with further ideas about improvements and further development of the existing models(Andersen 1993; Axinn & Matthyssens 2001; Forsgren 2002; Hadjikhani 1997).
2.0 Definition of Internationalization
Internationalization refers to the increasing importance of international trade, international relations, treaties, alliances, etc. Inter-national, of course, means between or among nations. The basic unit remains the nation, even as relations among nations become increasingly necessary and important. (Herman E. Daly, 1999)
In the classical nineteenth-century vision of Smith and Ricardo the national community embraced both national labor and national capital, and these classes cooperated, albeit with conflict, to produce national goods -- largely with national natural resources. These national goods then competed in international
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markets against the goods of other nations, produced by their own national capital/labor teams using their own resources. This is internationalization as defined above.
3.0 The history of Internationalization theories
3.1 International trade theory 3.1.1 Mercantilism (During the 1500s to the late 1700s); Mercantilism proposed that a country should try to export more than it imports, in order to receive gold. The main criticism of mercantilism is that countries are restricted from import, a prevention of international trade.
3.1.2 Absolute cost advantage (Adam Smith, 1776); Adam Smith developed the theory of absolute advantage that stressed that a country should produce goods or services if it uses a lesser amount of resources than other countries.
3.1.3 Comparative cost advantage (David Ricardo, 1817); David Ricardo stated in his theory of comparative advantage that a country should specialise in producing and exporting products in which it has a comparative advantage and it should import goods in which it has a comparative disadvantage.
3.1.4 Gravity model of trade (Walter Isard, 1954); The gravity model of trade in international economics, similar to other gravity models in social science, predicts bilateral trade flows based on the economic sizes of (often using GDP measurements) and distance between two units. The model was first used by Tinbergen in 1962. (Nello, Susan S.2009).The model has also been used in international relations to evaluate the impact of treaties and alliances on
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trade, and it has been used to test the effectiveness of trade agreements and organizations such as the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO).
3.1.5 Heckscher-Ohlin model (Eli Heckscher, 1966 & Bertil Ohlin, 1952); Hecksher-Ohlin's theory of factor endowments stressed that a country should produce and export goods that require resources (factors) that are abundant in the home country. Leontief tested the HecksherOhlin theory in the U.S. and found that it was not applicable in the U.S. Raymond Vernon's product life cycle theory stresses that a company will begin to export its product and later take on foreign direct investment as the product moves through its life cycle. Eventually a country's export becomes its import.
3.1.6 Leontief paradox (Wassily Leontief, 1954); Leontief's paradox in economics is that the country with the world's highest capital-per worker has a lower capital/labor ratio in exports than in imports. This econometric find was the result of Professor Wassily W. Leontief's attempt to test the Heckscher-Ohlin theory empirically. In 1954, Leontief found that the U.S. (the most capital-abundant country in the world) exported labor-intensive commodities and imported capital-intensive commodities, in contradiction with Heckscher-Ohlin theory ("H-O theory").
3.1.7 Linder hypothesis (Staffan Burenstam Linder, 1961); The Linder hypothesis is an economics conjecture about international trade patterns: The more similar the demand structures of countries, the more they will trade with one another. Further, international trade will still occur between two countries having identical preferences and factor endowments (relying on specialization to create a comparative advantage in the production of differentiated goods between the two nations)
3.1.8 Location theory;
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Location theory is concerned with the geographic location of economic activity; it has become an integral part of economic geography, regional science, and spatial economics. Location theory addresses the questions of what economic activities are located where and why. Location theory rests like microeconomic theory generally on the assumption that agents act in their own self-interest. Thus firms choose locations that maximize their profits and individuals choose locations that maximize their utility.
3.1.9 Market imperfection theory (Stephen Hymer, 1976 & Charles P. Kindleberger, 1969 & Richard E. Caves, 1971). Market failure is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. (The outcome is not Pareto optimal.) Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient that can be improved upon from the societal point-of-view.(John O. Ledyard , 2008). The first known use of the term by economists was in 1958,(Francis M. Bator, 1958). but the concept has been traced back to the Victorian philosopher Henry Sidgwick.(Steven G. Medema, 2007).
3.1.10 New Trade Theory New trade theory (NTT) is a collection of economic models in international trade which focuses on the role of increasing returns to scale and network effects, which were developed in the late 1970s and early 1980s.
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New trade theorists relaxed the assumption of constant returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market. Less quantitative forms of a similar "infant industry" argument against totally free trade have been advanced by trade theorists since at least 1848 (see: History of free trade).
3.1.11 Specific factors model In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. Thus, this model can be interpreted as a 'short run' version of the HeckscherOhlin model.
3.2 Traditional approaches 3.2.1 Diamond model (Michael Porter) The diamond model is an economical model developed by Michael Porter in his book The Competitive Advantage of Nations, where he published his theory of why particular industries become competitive in particular locations.(Traill, Bruce; Eamonn Pitts. 1998). The diamond model consists of six factors: Factor conditions Demand conditions Related and supporting industries Firm strategy, structure and rivalry Government Chance
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The Porter thesis is that these factors interact with each other to create conditions where innovation and improved competitiveness occurs. (Traill, Bruce; Eamonn Pitts. 1998).
3.2.2 Diffusion of innovations (Rogers, 1962) Diffusion of innovation is a theory of how, why, and at what rate new ideas and technology spread through cultures. Everett Rogers introduced it in his 1962 book, Diffusion of Innovations, writing that "Diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system."(Rogers, Everett M. 2003).
3.2.3 Eclectic paradigm (John H. Dunning) The eclectic paradigm is a theory in economics and is also known as the OLI-Model. (Hagen, Antje, 1997; Twomey, Michael J. 2000) . It is a further development of the theory of internalization and published by John H. Dunning in 1980.(Falkenhahn, Alexander; Roman Stanslowski, 2001). The theory of internalization itself is based on the transaction cost theory.(Falkenhahn, Alexander; Roman Stanslowski, 2001). This theory says that transactions are made within an institution if the transaction costs on the free market are higher than the internal costs. This process is called internalization.(Falkenhahn, Alexander; Roman Stanslowski,,2001). For Dunning, not only the structure of organization is important.(Falkenhahn, Alexander; Roman Stanslowski(2001). He added three additional factors to the theoryFalkenhahn, Alexander; Roman Stanslowski, 2001). Ownership advantages (Hagen, Antje, 1997) (trademark, production technique, entrepreneurial skills, returns to scale)(Twomey, Michael J, 2000). Locational advantages (existence of raw materials, low wages, special taxes or tariffs) Internalisation advantages (advantages by producing through a partnership arrangement such as licensing or a joint venture) (Twomey, Michael J, 2000).
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3.2.4 Foreign direct investment theory Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner.(Sullivan, Arthur; Steven M. Sheffrin, 2003). Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor.(Foreign Direct Investment, United Nations Conference on Trade and Development). The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The International Monetary Fund (IMF) defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment.(International Monetary Fund, 1993).
3.2.5 Monopolistic advantage theory (Stephen Hymer) The monopolistic advantage theory is an approach in international business which explain why firms can compete in foreign settings against indigenous competitors (Brgel, Oliver, 2000) and is frequently associated with the seminal contribution of Stephen Hymer. (Brgel, Oliver, 2000).
3.2.6 Non-availability approach (Irving B. Kravis, 1956) The non-availability explains international trade by the fact that each country imports the goods that are not available at home.(Gandolfo, Giancarlo, 1998). This unavailability may be due to lack of natural resources (oil, gold, etc.: this is absolute unavailability) or to the fact that the goods cannot be produced domestically, or could only be produced at prohibitive costs (for technological or other reasons): this is
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relative unavailability.(Gandolfo, Giancarlo, 1998). On the other hand, each country exports the goods that are available at home.(Gandolfo, Giancarlo, 1998).
3.2.7 Technology gap theory of trade (Posner) The technology gap theory describes an advantage enjoyed by the country that introduces new goods in a market. As a consequence of research activity and entrepreneurship, new goods are produced and the innovating country enjoys a monopoly until the other countries learn to produce these goods: in the meantime they have to import them. Thus, international trade is created for the time necessary to imitate the new goods (imitation lag).(Gandolfo, Giancarlo, 1998).
3.2.8 Uppsala model The Uppsala model (Elgar, Edward, 2003) is a theory that explains how firms gradually intensify their activities in foreign markets.(Blomstermo, Anders; Dharma Deo Sharma , 2003).) It is similar to the POM model.(Elgar, Edward , 2003). The key features of both models are the following: firms first gain experience from the domestic market before they move to foreign markets; firms start their foreign operations from culturally and/or geographically close countries and move gradually to culturally and geographically more distant countries; firms start their foreign operations by using traditional exports and gradually move to using more intensive and demanding operation modes (sales subsidiaries etc.) both at the company and target country level.(Elgar, Edward, 2003). )
3.3 Further theories 3.3.1 Behavioural theory of the firm (Richard M. Cyert & James G. March, 1963; Yair Aharoni, 1966); The behavioral theory of the firm first appeared in the 1963 book A Behavioral Theory of the Firm by Richard M. Cyert and James G. March.(Ahuja , 2007) The work on the behavioral theory started in 1952
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when March, a political scientist, joined Carnegie Mellon University, where Cyert was the President.(This Weeks Citation Classic) Before this model was formed, the existing theory of the firm had two main assumptions: profit maximization and perfect knowledge. Cyert and March questioned these two critical assumptions.(Zhang.)
3.3.2 Contingency theory; Contingency theory refers to any of a number of management theories. Several contingency approaches were developed concurrently in the late 1960s. They suggested that previous theories such as Weber's bureaucracy and Frederick Winslow Taylor's scientific management had failed because they neglected that management style and organizational structure were influenced by various aspects of the environment: the contingency factors. There could not be "one best way" for leadership or organization.
3.3.3 Contract theory; In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information. Contract theory is closely connected to the field of law and economics. One prominent field of application is managerial compensation.
3.3.4 Economy of scale; Economies of scale, in microeconomics, are the cost advantages that a business obtains due to expansion. They are factors that cause a producers average cost per unit to fall as output rises.(Sullivan, Arthur; Steven M. Sheffrin, 2003) . Diseconomies of scale are the opposite. Economies of scale may be utilized by any size firm expanding its scale of operation.
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3.3.5 Internalisation theory (Peter J. Buckley & Mark Casson, 1976; Rugm an, 1981); Internalization theory was conceptualized by Buckley and Casson (1976).The detail evolution will be explain at nest point
3.3.6 Product life cycle theory (Raymond Vernon, 1966) Product Life Cycle Management is the succession of strategies used by management as a product goes through its product life cycle. A product's life is the following of different phases : "NEW product", "GROWTH product", "MATURITY product" and "OBSOLESCENCE product" The conditions in which a product is sold changes over time and must be managed as it moves through its succession of stages. (Vernon, Raymond, 1966)
3.3.7 Transaction cost theory In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange (restated: the cost of participating in a market).( FIXGlobal, June 2010) Transaction costs can be divided into three broad categories:(Dahlman, Carl J, 1979) Search and information costs are costs such as those incurred in determining that the required good is available on the market, which has the lowest price, etc. Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. In game theory this is analyzed for instance in the game of chicken. On asset markets and in market microstructure, the transaction cost is some function of the distance between the bid and ask. Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.
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For example, the buyer of a new car faces a variety of different transaction costs. The search costs are the costs of finding a car and determining the car's condition. The bargaining costs are the costs of negotiating a price with the seller. The policing and enforcement costs are the costs of ensuring that the seller delivers the car in the promised condition.
3.3.8 Theory of the growth of the firm (Edith Penrose, 1959) While at Johns Hopkins, Penrose participated in a research project on the growth of firms. She came to the conclusion that the existing theory of the firm was inadequate to explain how firms grow. Her insight was to realise that the 'Firm' in theory is not the same thing as 'flesh and blood' organizations that businessmen call firms. This insight eventually led to the publication of her second book, The Theory of the Growth of the Firm in 1959.
4.0 The evolution of Internalization theories
Briefly, Buckley and Casson demonstrate that the MNE organizes bundles of activities internally such that it is able to develop and exploit firm-specific advantages (FSAs) in knowledge and other types of intermediate products. The proprietary ownership of such FSAs serves to overcome the externality of knowledge being a public good.
Buckley and Casson (1976) is a rare original contribution to thinking in the field of international business. The core idea that the MNE can replace the market, was developed completely independently of the thinking by Oliver Williamson (1975). Indeed, the linkage of internalization theory to the markets and hierarchy approach of Williamson was not resolved until publication of Hennarts 1977 dissertation, Hennart (1982). In many ways the book by Hennart is a far superior explanation of internalization
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theory principles within the Williamsonian context that builds upon concepts such as buyer uncertainty, asset specificity, and bounded rationality. In particular, Hennart (1982) is able to develop models that distinguish between vertical and horizontal integration and to explore in greater depth the alternatives of firm contracting versus market exchange.
Whereas the intellectual origins of Buckley and Cassons (1976) internalization theory do not lie with Williamson (1975), they are deeply embedded in Hymers work (1960, published in 1976). Hymer developed the concept of firm-specific advantages (FSAs). He also demonstrated that foreign direct investment only takes place when the benefits of exploiting FSAs across borders allow overcoming the additional costs of doing business abroad. Zaheer (1995) relabeled Hymers (1960) concept of costs of doing business abroad, as the liability of foreignness. However, whereas Hymer included in his concept the problem of information costs facing foreign firms vis--vis host country rivals, discriminatory treatment by their home government and foreign governments, and foreign exchange risks, the liability of foreignness concept is more narrowly focused on institutional differences among nations, and the resulting hazards of unfamiliarity, discrimination as well as relational hazards (Eden and Miller 2004).
The end result is the same, however: irrespective of the precise sources of differences among nations, the MNE faces adaptation costs when doing business abroad.
Hymer essentially adopts a firm-level, industrial organization approach to explain foreign direct investment. He was the first to contrast such firm-level FDI with the prevailing orthodoxy by economists that explained FDI as a financial (portfolio) investment decision determined by interest rate differentials across national borders (Dunning and Rugman 1985).
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In other words, Hymer recognized that FDI is a firm-level strategy decision rather than a capital-market financial decision. This distinction still eludes many economists. In a related paper, Dunning (1976) also popularized the Hymer approach and contrasted this with the international economics factor-cost explanation of international trade.
Dunning (1981) later combined this thinking into his eclectic paradigm in which location advantages capture differences among countries and regions, while internalization and ownership advantages reflect firm-level strategy decisions and the outcomes thereof.
In essence, internalization theory is a comparative institutional approach to the analysis of MNE behavior. Internalization theory allows assessing the relative efficiency and effectiveness of alternative governance mechanisms to manage economic interdependencies.
When the MNE is modeled as a network with a variety of strong and weak ties among subsidiaries and between parent and subsidiaries, it is possible to apply internalization theory thinking in order to evaluate the relative costs and benefits of managing these economic interdependencies across national (and conceptually regional) borders. This is an efficiency based, positive explanation of MNE functioning and organization. As such, internalization theory can be readily extended and linked to network analysis. It is fully compatible with explaining the boundaries of the firm, and the organizational distinctions between markets, hierarchy, joint ventures, and other organizational forms. Yet, in doing so it should be recalled that the initial work on internalization theory, especially in Buckley and Casson (1976) and Rugman (1981), was concerned mainly with the development and exploitation of FSAs inside the firm vis--vis the external market (which would entail the purchasing of technological
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knowledge at the input side or its licensing at the output side), that is, the economic benefits of internalization.
While Hennart (1982) does address internal organizational issues it was only later that scholars developed clearer analysis of alternative governance choices inside the MNE.
This is not surprising given the historical context of the MNE in the 1960s and 1970s. At the time of Vernons (1966) product life-cycle model, the typical U.S. MNE was hierarchical and highly centralized in terms of its organizational structure. Vernon found that most R&D was undertaken in the homecountry firm and that waves of technology went first to subsidiaries in Canada and Western Europe and only then to the worlds low factor cost areas, with each international expansion move leading to scope economies from operating across borders. Much the same centralized organizational structure was found by Rugman (1981) in his analysis of the subsidiaries of U.S. MNEs in Canada. For example, in Chapter 6 of his 1981 book, he explains that the Canadian subsidiaries of U.S. MNEs in Canada undertook only half the R&D of their U.S. parent firms. However, when a control group of Canadian MNEs of similar size was constructed, he found that these firms also did half the R&D of U.S. firms. Thus, a country factor was found to be more important than the firm factor: Canada in general did half the R&D of the United States. Rugman (1981) also extended internalization theory in a dynamic manner by contrasting FDI with exporting and licensing and constructing potential switchover points for each of the three entry modes over time. He also explored the implications of internalization theory for corporate finance and conducted tests of multinational banking, using his thesis of international diversification. Rugman (1976) and (1979) demonstrate that MNEs enjoy a steadier stream of earnings than do domestic firms of similar size, while controlling for industry effects.
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As a footnote it is worth noting that Rugman (1975) built upon the Hymer thesis of market imperfections, as explained in Kindleberger (1969), in an article which predates Buckley and Casson (1976). In Rugman (1975) there is a clear explanation of the market imperfections hypothesis and its relationship to the risk diversification hypothesis. However, Rugman (1975) does not develop the theory of internalization which remains an original contribution of Buckley and Casson (1976).
Further popularization of internalization theory occurred with Caves (1982), republished (1996). In this book which links industrial organization and international economics with a synthesis of literature on MNEs, internalization theory takes center stage as a basic model of the MNE. Subsequent work on the resource-based view has been slow to incorporate internalization theory but Rugman and Verbeke (2003) demonstrate that dynamic capabilities and the resource based view are fully compatible with dynamic extensions of internalization theory. It is also possible to extend internalization theory thinking to analyze networks and other types of nonequity forms of FDI, see Rugman and Verbeke (2003).
Perhaps the most important paper linking internalization theory with more modern thinking on international business strategy occurs in Rugman and Verbeke (1992). Here, the authors contrast nonlocation-bound FSAs (available to the entire network of the MNE) with location-bound FSAs (available only to certain affiliates, whether in the home country or host countries). The location-bound FSAs are idiosyncratic strengths with limited geographical deployment and exploitation potential. If developed at the subsidiary level, these FSAs allow national responsiveness in a host economy. They are not transferable to the network of the MNE. However, some location-bound FSAs developed in foreign subsidiaries can become best practices and be transformed into non-location-bound FSAs, though such practices are rare.
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The distinction between non-location-bound FSAs and location-bound FSAs was taken up in Rugman and Verbeke (2003), and it has the potential to further extend internalization theory into network analysis: the point is that each MNE affiliate commands idiosyncratic FSA-bundles. It is precisely the content of these bundles as well as their development and exploitation trajectory over time that determines each affiliates role in the MNE and drives interactions with other affiliates.
Finally, internalization theory is now being reconciled with the empirical observation in Rugman and Verbeke (2004) and Rugman (2005) to the effect that most of the worlds largest 500 firms operate within the home region of the triad of the EU, North America, and Asia Pacific. The failure of even the worlds largest firms to operate globally, defined as at least a 20% share of total sales (or assets) in each region of the triad with less than 50% of sales in their home region, suggests that there is an interregional liability of foreignness. The data reported by these firms imply it is difficult to engage in aggregation, i.e., to earn economies of scale and scope (e.g., branding or marketing advantages) across other regions of the triad, meaning that much of the so-called non-location-boundedness of FSAs has actually been overstated: the exploitation potential of many FSAs is often restricted to the MNEs home region (e.g. the European Union for a European firm). The data also suggest that inter-regional adaptation, i.e., being responsive to the requirements of host regions is very difficult to achieve. Only arbitrage, i.e., exploiting national or regional differences as seen increasingly in the context of dispersed, vertical value chains, often appears feasible, with some upstream activities occurring in the most attractive locations worldwide (e.g., information technology services in India; manufacturing of commodity-type products in China, etc.).
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The above suggests that the inter-regional liability of foreignness exceeds the perceived benefits of globalization. The worlds largest firms appear to experience difficulties in gaining benefits of aggregation and reducing costs of adaptation across regions, as compared to what occurs in their home region. Only in the realm of arbitrage it appears that some upstream activities can indeed often be performed anywhere in the world to benefit from generally available CSAs/LSAs, subject to the condition that the resulting production can be integrated efficiently in the MNEs international supply chain, with downstream activities often concentrated in the home region.
Part B
What is international trade? International trade is an economic exchange or transaction involving the movement of goods, services and capital across borders from one country or territory to another. Although trade has flowed around the globe for thousands of years, it is in modern times that its economic importance has significantly increased. In most countries, international trade now plays a major part in their economies. Over time, economists have developed several international trade theories not only to understand it better but to guide governments in policy making and help businesses to profit from it. Some of the most influential international trade theories have been mercantilism, absolute advantage and comparative advantage.
The Internationalization theory influencing of SME Swedish scholars Johansen and Paul are founders of the theory on Internationalization of SME,. They studyed four Swedish enterprises history of multinational operating, and put forward the law that enterprises international process follows:from easy to diffcult, and gradually escalating.
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In the internalization theory process , the evolutionary theory on Internationalization of SME, which can also be called Stage Model of SME, appeared in 1970s, and now have been the classical theory in Internationalization of SME.
I this part, I look forward to through some scholar perspective of the evolutionary of this theory to illustrate the internationalization theorys sink or swim in its developing process.
Liu Haiyun, a scholar in China, believed that the process of one companys development at the same time is the one that accumulates and establishes its advantage, when he stated whether SMEs could make direct investment to overseas. Under modern circumstances, SMEs possess the same factors in international operations as big enterprises, except they are in different steps, and they have different aims and actives when invest. And they must endure a step for studying and accumulating experiences before they can make full use of the adventure advantages. Another scholar named liang Nengze in our country discussed the gradualism theory from the point of view that enterprise should continuously improve the ability of studying. The internationalization of enterprises is not only enlarging simple production of their sales scale,but in fact, its the managers studying, mastering and absorbing concerned knowledge, and the process of accumulating the knowledge of international marketing. The process of studying is only a gradual one. On one hand, there is an unknown international market, on the other, there is a limit ability of studying. The enterprise promotes the process of internationalization during continuously solving the contradiction.
Besides the above viewpoints, this article also believes that, the process of gradual mode also is the process which SME unceasingly grows, the internationalization of SMEs in the growth process not only may take as the goal, but is the main one of the growth opportunity origins. The internationalization
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management has provided the looser growing space and the more growing opportunities. In the international market, there are numerous usable markets for SME. It is a vitality to change to the international market when the domestic competition makes the growth space more and more narrower. Through the more complex disciplining in the international market, the enterprise will attend to the domestic market competitive more actively. So is the Jindan lactic acid. It is impossible to create good growing conditions if there is not the international market attending when domestic market pressure is heavier and heavier, and growing opportunity is smaller and smaller.
Common Evolutionary theory as the classic theory of the current internationalization of SME, to a large extent, is suit for the actual process of the internationalization of SME, so it has strong vitality and interpretative. Follow the evolutionary pattern, SME can rich its experience in international operations, and reduce the risk to a minimum. But misinterpretation and abuse of such model may result in the imbalance between domestic development and international development. SME may excessive focus on domestic development in the present stage and view international development as task of the next phase of growth, and neglect the current international development opportunities. The so-called "Poverty gives rise to a desire for change ", the domestic market pressure will force SME to branch out abroad, but domestic long-term and small-scale success will cause enterprises, particularly growing enterprises lack of experience with a strong domestic tendency think the domestic environment is enough to support the growth of enterprises, the overseas development of the domestic market is only giving an added grace to what is already beautiful of domestic market.
In fact, for such a business, the greatest obstacle to internationalization is not the right time, and the lack of material conditions, but the lack of a global enterprise culture. From this perspective, Western theory considers the progressive model as the traditional model of the internationalization of SME, as opposed
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to the international pattern is " Start in the whole world of SME." Start in the whole world means that SME start with transnational business strategy, and possess the institutional framework that serve for strategy from the beginning.
Along with the development of advanced technology such as the Internet, SME with global capacity will increase in Europe and the United States and other countries. But according to China's macroeconomic development, enterprise technology, management level and industrial location at present, not many large enterprises possess the ability to start international operations one step, evolutionary theory is still one of the most suitable international patterns for Chinese SME.
How Globalization influences Internationalization ? The global economy as a worldwide economic system began ca. 1500 with the rise and spread of commercialism and has evolved into an expanding system of industrial capitalism. The primary driver of globalization is rapid technological change in core countries and their ability to dominate production of consumer goods to the rest of the world. It involves the increasing interdependence of national economies, financial markets, trade, corporations, production, distribution, and consumer marketing. By its very nature, globalization draws attention to the economic and technological aspects of life, and to change at the level of culture or identity.
Globalization draws attention to the role of transnational corporations in creating a global market and system of production; to capital markets in creating an integrated financial system; and to bodies such as the International Monetary Fund (IMF) in disseminating a particular view of the state's role within the international economy. The idea of globalization is the object of controversy. Some of the more dramatic and simplistic versions of the globalization thesis have been challenged by scholars and journalists who are skeptical about the actual extent of transnationalized economic activity.
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The hyperglobalist perspective contends that history and economics have come together to create a new order of relations in which states are either converging economically and politically, or are being made irrelevant by the activities of transnational business. Economic policies are determined more by markets than by governments and, in the economically developed portions of the world, the telecommunications media have facilitated the spread of global mass culture. According to the hyperglobalist perspective, key production factors such as capital technology and even labor are globally mobile and the notions of national products, national industries and national corporations have become redundant, as have the nation-state and its strategies.
Globalization has weakened the ability of nation states to regulate economic activity and govern transnational corporations. To achieve this they have moved production facilities to where costs are lowest and they adjust revenues in different countries in order to pay less tax and receive more subsidies. The hyperglobalist perspective leans towards the formation of one single world order, represented in international education by those who see a system of education, which transcends national frontiers.
The skeptical perspective argues that globalization is an apology for the current dominance of neo-liberal free market capitalism or for the spread of social democratic regulation of markets. The skeptical perspective makes a contrast between globalization and the internationalization of trade. It argues that historical evidence indicates that the world is not becoming a single market but that it is the development of regional economic blocs and the facilitation of trade between countries. For the skeptical perspective, the economic era in which the Gold Standard between national currencies prevailed represents a far more globalized economic system than exists today. The skeptics point to equal or greater integration in history and that a strong nation-state is needed to ensure the efficient running of the global economy. Skeptics see globalization as a process not an end state.
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The skeptical perspective is more convincing because internationalization and globalization are contradictory trends, since international trade is strengthened by the existence of nation states whose policies actively regulate and promote it. The formation of regional trading blocs results in two classes of countries, those countries that are members of the blocs, and those that are not. The increasing internationalization of trade between some countries has led to the marginalization of others, such as African countries like Somalia.
The skeptic perspective is more convincing because the nation-state does have a role in a globalized world. Nation-states do have the capacity to exert considerable power over the large TNCs that have emerged out of the new globalized economy. Evidence for this comes historically when the first great globalization was ended by nation-states taking back control. The first great globalization ended as it did because nation-states panicked as a result of losing direct control of domestic markets, along with the immediate losers of globalization causing political unrest.
One of the trends of globalization is depoliticization of publics, the decline of the nation-state, and end of traditional politics. What is happening is that changes in technology and work relationships are moving too quickly for cultures to respond. Social, legal, and cultural safeguards, the result of people's efforts to defend the common good, are vitally necessary if individuals and intermediary groups are to maintain their centrality.
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A case study through The internationalization process of Chinese MNCs to explain some unperfect point of the internationalization practice.
In Rebecka Andersson and Jennie Wangs thesis had defined the differences in the internationalization process of Chinese MNCs to that of MNCs from developed countries. Earlier, firms from developed countries have entered developing countries in order to gain cost advantages. However, in recent years MNCs from emerging markets have entered developed countries. They had found that Chinese MNCs often have had a rapid internationalization which has been possible thanks to globalization. Globalization has led to the integration of national markets, which has made business networks increasingly important for companies to survive.
Globalization has forced many governments in emerging markets to open up borders. This has enabled MNCs from emerging markets to internationalize. Common for emerging markets is the strong impact of the government on the internationalization of firms. This is also the case for Chinese firms, where financial support from the governmental has been crucial for the success of firms.
Moreover, while MNCs from developed countries base their business decisions on economic rationality to lower costs through internalizing, Chinese firms do not always operate according to economic rationality to the same extent as do MNCs from developed countries. Therefore, the internalization advantages may not be applicable to a number of Chinese firms as these firms can rely on financial support from the Chinese government.
However, the localization advantages are still applicable to Chinese firms as it can explain why these firms enter other markets. Rebecka Andersson and Jennie Wangs study shows that Chinese firms enter
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developing countries to access natural resources and new markets. The motive for entering developed countries is to acquire strategic assets and technology. Reasons to enter certain developed countries are to access markets with a large customer base of ethnic Chinese, and to easier build up a business network among the population of ethnic Chinese abroad. These motives can also be explained by Chinese firms choosing markets with small psychic distance, with regards to a foreign market having a large population of ethnic Chinese.
To access strategic assets and technology, investments to developed markets are often made through acquisitions. This is possible as Chinese companies have access to much capital and a supportive government. The increase of Chinese OFDI to developed countries in Europe during the crisis of 2008 supports the view that Chinese companies acquire companies in insolvency in developed countries. Rebecka Andersson and Jennie Wangs case study of Haier shows that its internationalization has been gradual, by starting with export to countries with small geographic distance. Although Haier entered developing countries first, its focus has mainly been on entering developed countries. Haier conforms to the theory as it has linked with successful businesses through different networks, partnerships and alliances, which have enabled it to leverage knowledge and technology in a continuous learning process. Haiers rapid internationalization is a characteristic found among many emerging market MNCs. Haier conforms to four of the seven springboard steps outlined to explain the international expansion of emerging market MNCs. In contrast, the three remaining steps cannot be clearly defined in Haiers internationalization. Moreover,Rebecka Andersson and Jennie Wangs study shows that Haier cannot be classified as a typical Chinese MNC as it possesses a number of characteristics which are rather found among MNCs from developed countries. These characteristics are outlined in the section that follows.
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First, Haier has mainly engaged in market-seeking investments, both in developing and developed countries. The reason for entering developed countries is primarily due to gaining market shares rather than acquiring technology. This is due to its characteristics of being a consumer electronics company, where the products do not require advanced technology. Second, Haier has not internationalized through M&As, but mainly through greenfield investments. Third, Haier can be classified as originating in a business environment of stage three and four , due to its operations in both developing and developed countries to gain strategic assets and to access new markets through greenfield investments and strategic alliances.
Conclusion
In this paper, the author try to explain why the Internationalization theories cannot fully explain the phenomenon of current international business, internationalization really a macro topic in current world situation, and author use two line to show it. At the part A, author used the type of literature review to exhibited some unperfect theory and some limited stage of models. In the part B, author use for referenced by some case analyzed and attempt through connected these realized evidences to showing the gaps in one's theory. Its really not easily, but across this project author had a big improved about the knowledges of international business .
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Faculty of Business & Information Science