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Morgan and Katsikeas Theories of International Trade FDI and Firm Internationalisation A Critique
Morgan and Katsikeas Theories of International Trade FDI and Firm Internationalisation A Critique
Morgan and Katsikeas Theories of International Trade FDI and Firm Internationalisation A Critique
Theories of international trade, foreign direct investment and firm internationalization: a critique
Robert E. Morgan Constantine S. Katsikeas
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To cite this document:
Robert E. Morgan Constantine S. Katsikeas, (1997),"Theories of international trade, foreign direct investment and firm
internationalization: a critique", Management Decision, Vol. 35 Iss 1 pp. 68 - 78
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Arild Aspelund, ystein Moen, (2001),"A generation perspective on small firm internationalization: From traditional exporters
and flexible specialists to born globals", Advances in International Marketing, Vol. 11 pp. 197-225
Alex Rialp, Josep Rialp, (2001),"Conceptual frameworks on SMEs' internationalization: Past, present and future trends of
research", Advances in International Marketing, Vol. 11 pp. 49-78
ystein Moen, (2002),"The Born Globals: A new generation of small European exporters", International Marketing Review,
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Robert E. Morgan
Cardiff Business School, University of Wales, UK
Constantine S. Katsikeas
Cardiff Business School, University of Wales, UK
Management Decision
35/1 [1997] 6878
MCB University Press
[ISSN 0021-1747]
[ 68 ]
Introduction
At its most basic, economic exchange across
national boundaries has taken place for several centuries. Furthermore, one of the most
remarkable aspects of economic life nowadays is the manner in which all countries
increasingly find themselves an intrinsic part
of the global economy (Auerbach, 1996). Such
interdependence means that the concepts of
the global village and spaceship earth are
reflections of the fact that the contemporary
marketplace is inherently international.
Moreover, this new world order with its international competition, economic trading blocs
(e.g., Association of South East Asian
Nations, North American Free Trade Agreement and the Single European Market) and
global emphasis, is forcing firms towards a
new reality (Lazer, 1993, p. 93) which
demands a global marketing imperative.
Czinkota et al. (1995) have described this scenario as follows:
The global imperative is upon us! No longer
merely an inspiring exhortation, thinking
and acting globally is the key principle for
business success. Both the willing and the
unwilling are becoming participants in
global business affairs. No matter how large
or small your business, ready or not, here
comes the world (p. 1).
In attempting to explain cross-national commercial activities, the international economics, international finance and international
business literatures have, over the last three
decades, witnessed significant advances.
However, such intellectual developments
have fostered a diversity in knowledge which
is evident from the range of extant theories.
This article will endeavour to explore many
of these theories and provide an understanding of the mechanics and processes witnessed
in cross-national trading activities at both
macro and micro levels of analysis. The discussion is presented by way of an exposition
of international trade and economic theory,
which is followed by a review and assessment
of international trade theories, foreign direct
investment (FDI) theories and internationalization theories of the firm. The majority of
the presentation is given to a discussion of
the third set of theories which is believed to
be an area where most contemporary
Management Decision
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[ 69 ]
exporting are the only mechanisms for transferring goods and services across national
boundaries (Bradley, 1991).
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Table I
Selected theories of international trade and foreign direct investment
Theory type
Theoretical emphasis
Credited writers
Countries gain if each devotes resources to the production of goods and services
in which it has an advantage
Ricardo (1817)
Smith (1776)
Countries will tend to specialize in the production of goods and services that
utilize their most abundant resources
The cycle follows that: a countrys export strength builds; foreign production
starts; foreign production becomes competitive in export markets; and
import competition emerges in the countrys home market
Hymer (1970)
The propensity of a firm to initiate foreign production will depend on the specific
attractions of its home country compared with resource implications and
advantages of locating in another country
Dunning (1980)
Fayerweather (1982)
Internalization theory
Internalization concerns extending the direct operations of the firm and bringing
under common ownership and control the activities conducted by intermediate
markets that link the firm to customers. Firms will gain in creating their own
internal market such that transactions can be carried out at a lower cost within
the firm
[ 70 ]
Concept of internationalization
As was recorded in a seminal article by Hayes
and Abernathy (1980), the trade deficit performance of a nation cannot always be explained
by macro-economic phenomena. It needs to
be recognized that the role of the entrepreneur plays a part in explaining the international trading activities of a nation. Given
that an economy may comprise several industries accommodating an array of firms, it
appears reasonable that the role of decision
makers within such organizations can, collectively, provide a substantial contribution to
economic performance. In contrast to the
international trade and FDI theories, outlined above, internationalization theories
endeavour to explain how and why the firm
engages in overseas activities and, in particular, how the dynamic nature of such behaviour can be conceptualized.
[ 71 ]
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[ 72 ]
Innovation-related internationalization
taxonomies
An extensive volume of research has examined the way in which firms progress along
the internationalization continuum and suggests that a sequence of discrete stages exists
which proxy the stop and go (Dalli, 1994,
p. 92), stepwise process exemplifying the
evolution of international involvement.
Implicit between each set of stages is the
notion that fairly stable periods exist in
which firms consolidate and generate an
appropriate resource base to respond to
fortuitous environmental conditions which
allow them to proceed to the next internationalization stage. Tables II and III illustrate
selected innovation-related internationalization taxonomies, all of which follow a similar
sequence based on organizational learning
and derive, in part, from Rogers (1962) stages
of the innovation adoption process.
Innovation adoption describes the selection
of an innovation as the most acceptable alternative, among a series of options, at a given
point in time (Zaltman and Stiff, 1973). The
utilization of the innovation adoption framework in export decision making was first
considered by Simmonds and Smith (1968)
but significant advances were made by Bilkey
and Tesar (1977). These authors concluded
that the process of export development was
depicted by several distinct stages and that
various different factors affected decision
making at each stage.
The taxonomies highlighted in Tables II
and III share many of the same characteristics. However, the main differences include
the number of stages in each model. For
example, Bilkey and Tesar (1977) and
Czinkota (1982) recognized six stages, while
Rao and Naidu (1992) were only able to identify four stages in their research. A brief
discussion will now follow for each of the
taxonomies presented in Tables II and III.
Bilkey and Tesar (1977) conceptualized the
process of export development on the basis of
firms increasing involvement in exporting to
psychologically more distant markets. Their
taxonomy was composed of six export development stages with the extremes ranging
from firms whose management had no interest in exporting to those whose management
explored the feasibility of exporting to perpetually greater psychologically more distant
countries.
Cavusgil (1980) proposed a taxonomy with
five stages which were described as firms
activities in: domestic marketing; pre-export
involvement; active export involvement; and
committed export involvement. This export
development process was founded on managements successive decisions regarding
exporting over a period of time. Furthermore,
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taxonomy so as to be able to target government export assistance requirements effectively. Six distinct groups of firms emerged,
which ranged from those completely uninterested in exporting, and restricted to the
domestic market, to those that could be
described as experienced large exporters. An
empirical investigation revealed that firms,
at various stages, significantly differed in
terms of their organizational and managerial
characteristics.
Lim et al. (1991) expanded on the work of
Reid (1981) and identified four levels of export
innovation, these being: export awareness;
export interest; export intention and export
adoption. Strong evidence of support for this
framework was found which suggested that
innovation adoption does have considerable
applicability in the context of export decision
making.
Rao and Naidu (1992) analysed groups of
firms according to an a priori assignment of
firms classed as: non-exporters; export intenders; sporadic exporters; and regular
exporters. This taxonomy was empirically
tested and validated on the basis that each
stage captured the distinct attributes of firms
internationalization activities.
All of these taxonomies possess a common
theme in which they attempt to introduce a
classification of export behaviours which
generate heterogeneous profiles of firms that
reflect different degrees of development along
a reference line of internationalization.
Table II
Selected innovation-related internationalization taxonomies
Bilkey and Tesar (1977)
Stage 1
Management is not interested in exporting
Stage 2
Management is willing to fill unsolicited orders,
but makes no effort to explore the feasibility
of active exporting
Stage 3
Management actively explores the feasibility
of active exporting
Stage 4
The firm exports on an experimental basis to
some psychologically close country
Stage 5
The firm is an experienced exporter
Cavusgil (1980)
Reid (1981)
Stage 6
Management explores the feasibility of
exporting to other more psychologically
distant countries
[ 73 ]
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Incremental internationalization:
contradictory evidence
Both the Uppsala internationalization model
(and related hybrid models) and the innovation-related internationalization taxonomies
confirm the fundamental tenet that a firms
internationalization is largely attributed to
two key elements: the amount of knowledge
the firm possesses, particularly experiential
knowledge; and uncertainty regarding the
decision to internationalize. Despite the
widespread recognition and general acceptance of these models in the extant literature,
they have been recently subject to criticism
regarding their theoretical foundation
(Anderson, 1993) and generalizability (Sullivan and Bauerschmidt, 1990).
planning in the process of internationalization and found that the incremental stepwise
development of firms was the exception
rather than the rule. They concluded that, in
the early part of international involvement,
firms rely on market experience and thereby
make incremental adjustments. However, as
the degree of international experience
increases, planning systems are implemented
which formalize strategic analysis and information search. International involvement
continues to increase to the extent that
experience may be translated across different
markets and between various product groups,
thus, enabling firms to leapfrog the incremental process within markets. Similar arguments of leapfrogging have been proposed by
researchers in other contexts. For example,
international involvement patterns by
Swedish (Hedlund and Kverneland, 1983) and
Australian (Bureau of Industry Economics,
1984) firms have found this to be the case.
Second, an important issue of intra-stage
evolution is not considered within these
models. Commonly referred to as
micro-internationalization (Dalli, 1994,
p. 95), this issue can have significant
implications for the development of small and
medium-sized firms because a number of
subtle changes regarding systems, procedures and other internal and external phenomena may influence their outlook on
exporting (Bonaccorsi and Dalli, 1990).
Third, it is largely considered that firms
advance along the path of internationalization
Table III
Further selected innovation-related internationalization taxonomies
Wortzel and Wortzel (1981)
Czinkota (1982)
Stage 1
Importer pull
Export awareness
Stage 2
Basic production capacity marketing
Export interest
Stage 3
Advanced production capacity marketing
Export intention
Stage 4
Product marketing channel push
Export adoption
Stage 5
Product marketing consumer pull
Stage 6
The experienced large exporter
[ 74 ]
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Conclusions
This critique was based on the premiss that
the function of a theory is that of preventing
the observer from being dazzled by the fullblown complexity of natural or concrete
events (Hall and Lindzey, 1957, p. 9). Therefore, theoretical statements have two purposes: to organize parsimoniously; and communicate clearly (Bacharach, 1989). Despite
the fact that sophisticated frameworks have
been advanced to assess the rigour of theories
(e.g., Blalock, 1969; Dubin, 1976; Nagel, 1961;
Popper, 1959), the approach taken here
adopted the stance of a broad review of the
major extant theories of international trade,
foreign direct investment and firm internationalization.
Many of the theories detailed in this article can be considered laudable (Bradley,
1987) and satisfy the general criteria of
theoretical parsimony and communicability.
In demonstrating this, illustration was given
to the issues underlying each theory and
certain contrasts were drawn between the
theory types in an effort to frame them in
relation to their intellectual biases of
international economics, international
finance and international business. While
no specific attempt was made to compare the
theories, the discussion emphasised their
particular focus, accredited writers and
general conclusions.
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Application questions
1 How well does the body of theory on international trade inform actions in international trade in your experience? How
useful is it?
[ 78 ]