Outsourcing and Reshoring 1
1. Determinants of Internationalization
Can International Business Theories Interpret Current Business
Internationalization Processes?
When analysing the theoretical contributions in the matter of
International Business and Management, it may be observed that these
studies are often strongly influenced both by their historic period and by
the geographic origin of the analysed companies; they are, then, hard to
generalize outside of a specific setting in space and time.
Before the 1970s, internationalization was considered as a
fundamental phase in the evolutionary process of American companies,
one that, in sequential terms, was held to follow that of expansion on
local markets (Vernon 1966; Chandler 1962). The following underlying
determinants were identified:
– The weak systemic connection in the oligopolistic structure of the
US market (Knickerbocker 1973), or the oligopolistic rivalry among
companies (Vernon 1966; Flowers 1976; Graham 1978).
– The more contained labour costs abroad.
– The dollar’s continued appreciation against foreign currencies,
typical of the 1960s; this contributed towards deteriorating the
exchange rates and consequently encouraged United States
companies to replace exports
– which were being countered by declining foreign demand
– with direct foreign investment.
– The limited nature of the available technological and productive
skills, which led to choosing internationalization as an alternative to
diversification on the domestic market. This was in order to better
exploit the knowledge and skills that were possessed, by applying
them to similar activities abroad instead of seeking to conquer new
spaces through diversification into activities unknown on the
domestic market.
Chandler’s analyses show the sequential stages of development of
large United States multinationals: in the initial start-up and development
phases, organizations began to concentrate monetary and knowledge
resources in the “core” business and within the confines of the domestic
market; only after achieving a sustainable, long-lasting edge in the
undertaken businesses did the companies proceed—in successive stages
and with a view to international expansion—with correlated
diversification strategies and, lastly, with conglomerated diversification
strategies.
Moreover, internationalization was considered a mandatory path; its
raison d’être lay in the managerial imperative of a growth often
obligatory when the produced goods were in a phase of
maturity/saturation of the domestic market. Internationalization could
also be pursued to cope with a situation of high risk levels connected
with the company’s “weak” position on the customers’ familiar market
(excessively concentrated market), or with the suppliers’ strong
contractual power.
Therefore, internationalization for diversification was seen as the
final phase in a growth process on a corporate level, induced by the need
to invest surplus resources in value-generating activities.
Aimed at expanding business activities into new sectors or
businesses, this “portfolio perspective” had its start in the need to
reinvest the surpluses generated by cash cow activities in “stars” or
“question/problem” activities. From this standpoint, emphasis was
placed on the objective of optimizing the corporate portfolio of strategic
business areas that, as is known, required investment in new areas of the
surplus liquidity created by mature businesses (self-produced financing),
for which the company enjoyed a high relative market position. Implicit
in these statements is the coverage of the financial risk that is higher
when going into new businesses, and that may, for many authors, be
accessible only to firms that record levels of available capital for new
investments.
Therefore, the determinants of internationalization took concrete
shape mainly in an optimization of the portfolio of the company’s
activities, and therefore in advantages exclusively financial in nature.
2 A. Calvelli and C. Cannavale
The strategy generally aimed at investing excess liquidity in the needs
required by current investments, or targeted obtaining, from new
investments, rates of yield higher than those already achieved in the
company.
By abandoning the “dogs”—activities discontinued by local
operators because they were considered no longer profitable—“supply
voids” were often generated, which were exploited by foreign companies
to gain entry into new markets. These are the determinants that led
Japanese companies to penetrate the American market while also
confirming the success of Japan’s incremental strategy. Entering into
“supply voids” in fact allowed Japanese firms to open a “window” onto
the US market, and to use it as a “springboard” for placing other home-
country products abroad. In fact, this type of entry helped lay the
foundations for assimilating knowledge of the US market, and for
Japanese enterprises to take on the character of “internal operator.”
Referring once again to the evolved development models,
International Business literature has its origins in economic models,
which explained the evolution of international trade and of foreign direct
investment (FDI), and in organizational theories, which interpreted the
growth of US multinationals during the 1960s. This current of study also
includes the theoretical contributions developed after the Second World
War with the intensified flows of FDI by Western and above all
American multinationals.
Emerging in the first place are the contributions that interpret
internationalization as a process by phases, presenting a growing level of
companies’ foreign involvement (Vernon 1966).
According to Vernon, the company, by developing innovative
technologies during the introduction phase, begins its process of
expanding on the domestic market as a “first comer.” Only after having
acquired a dominant position on the market, and when joined by a
“second comer” within domestic boundaries, does the company,
following a market- seeking logic, begin to export its output to target
countries with a demand gap. At least from the theoretical standpoint,
exporting makes sense so long as the sum of the transport costs plus the
marginal production costs are less than the average production cost in the
markets being exported to.
The determinant underlying a process by phases is the reduction of
entropy risk, and companies’ choices to enter new markets are seen as
the result of the technology gap between the domestic market and the
foreign country, or as the attempt to cope—again by exploiting
technology gap— with the risks connected to the maturity phase of the
“product life cycle.”
In the maturity/decline phases, technology is entirely mature,
standardized, and perfectly accessible to local imitators, so the costs take
on primary importance for the company, as it is also forced to cope with
the imitative processes developed by local producers in host countries;
looking to economize, the company is more apt to delocalize production
(by means of FDI) to developing countries with lower labour costs.
The Vernon model was long the most well-known and generally
accepted model for interpreting FDI, and in fact it made a considerable
contribution towards understanding American companies’ international
growth processes. However, over time, the Vernon model’s explanatory
power gradually declined, as it was incapable of interpreting increased
FDI oriented towards destinations not always characterized by lower
levels of development, or of explaining the trend among companies to
make this investment while the product life cycle was in its development
phase (Calvelli 1998; Cannavale 2008), in order to prevent followers
located in the outlet markets from quickly appropriating the technology
(even if it is incorporated into production), or from producing the same
goods at lower costs (Rapp 1973).
Moreover, focusing attention on the current trends in the process of
companies’ internationalization towards emerging countries highlights
other interpretative limits of the Vernon model. In the first place,
companies in the industrialized countries are rarely following a path of
development by phases that starts with exporting and ends with FDI.
Among other things, it is anachronistic to consider as modes of
internationalization only those of the competitive type, while relegating
to residual choices the collaborative-type modes that were more in use
starting from the 1990s.
 Outsourcing and Reshoring
In the second place, the international development model of SMEs,
the step-by-step “stage” model describing the transformation of SMEs
into MNCs in phases of sequential development, was refuted by later
research (including, among others, cf. Knight 2000), which showed that
some SMEs, such as those in the tech industry, were able to quickly
bypass the various phases of this “stage” model. Moreover, many SMEs
undertook the internationalization process with a “born global”
approach, seeking to seize global opportunities in an early phase in their
life cycle; often, a “born global firm” launches itself on foreign markets
to exploit a global niche right from the start of its activity.
One example of a “born global” company is the case of Lush Fresh
Handmade Cosmetics, a maker of natural, handmade beauty products
that are never tested on animals. Founded in Dorset, England, in 1995,
the brand opened its first North American location, in Vancouver, after
barely one year of existence, and immediately thereafter expanded with
factories and stores worldwide (Source: Data Base DISAQ).
As to the procedure for implementing internationalization choices,
the search to exploit lower-cost resources is not necessarily leading
companies to invest abroad, unless required to by regulations in the host
countries; most of the time, companies entrust their production to
subcontractors located in factor-rich countries.
The same interpretative limits are also present in Hymer’s theory of
market power (Hymer 1960, 1976). For the author, the markets’
imperfections constitute the main source of the oligopolistic advantages
of companies—advantages that take substance in greater market shares
and, consequently, bigger profits.
For Hymer, FDI may more effectively grasp the market’s
imperfections since, in conditions of perfect competition, exports or the
granting of licences are preferable. Moreover, FDI is more advantageous
than other modes of implementing internationalization strategies, even
when there are trade limitations or highly unstable currencies.
Caves (1971) also picked up on Hymer’s approach, adding another
variable: the size of the investing company. To gain “ownership
advantages” on foreign markets, the company must be large in size,
because it must already have achieved suitable economies of scale on the
3
domestic market, it must be able to overcome barriers to entry onto
foreign markets, and it must be able to withstand high risks.
The determinants proposed by Hymer present the same limitations as
the Vernon model as concerns interpreting modern companies’
internationalization processes. But Hymer’s model, by focusing attention
only on market-seeking orientations, underscores the limitations
imposed by failing to heed the factors (cultural, regulatory, competition-
related) that may hinder companies on the path of increasing their own
market power when the host countries are culturally distant from familiar
ones.
The focus on the market’s imperfections is also a feature of
internalization theory, which plays a central role in the branch of studies
on international business theory. Underpinning the theory developed by
the English researchers from the “Reading School” (Buckley and Casson
1976; Rugman 1981; Casson 1987; Hennart 1982) is the assumption that
MNCs pursue dimensional growth decisions implemented by creating
internal markets (creating branches, creating own research centres, etc.),
when foreign markets (especially of the factors of labour, raw materials,
etc.) are non-existent or imperfect. This is to say they present flaws (costs
due to dearth of information, or due to the presence of opportunism and
of “firm-specific” activities) that end up distorting the input prices (in
favour of the incoming companies). Multinationals, which possess
specific technological and market knowledge, achieve firm-specific
advantages and therefore enjoy a sort of protection in their internal
markets. In this regard, for Hymer (1968), the FDI of productive
activities protects companies from competition and helps them maximize
the quasi-income arising from technological advantages and from the
products’ differentiation.
The fundamental framework of the internalization theory is to be
found not only in Coase’s “institutionalist theory” on the process of
external/internal substitution but also in Williamson’s theory of
transactional costs (Williamson 1979, 1991), aimed at the quest for
efficiency (economizing). This also offers a methodological basis for
determining the transactions to be internalized in the hierarchy/market
(or “make or buy”) dichotomy: the company, as an economic and
4 A. Calvelli and C. Cannavale
organizational structure, tends to prefer cooperative relationships within
it (internalization) over market relationships, to the point that the costs
for internalizing an additional transaction exceed the corresponding
benefits
However, it bears noting in the first place that the internalization
approach completely neglects, among the factors determining the
choices, the greater costs that may arise from the need to coordinate and
control the decentralized activities. These costs may be greater or lesser
depending on the distances between the market of origin and the
destination countries; the presence of nation-specific factors that may
impede the development of relationships with local players; and the
presence of firm- specific factors, such as the technological and
managerial resources of the parent company, which may be hard to
transfer abroad.
In the second place, the conditions for business growth are induced
not only by the flaws in (or non-existence of) “external” markets but also
by managers’ ability to succeed in promptly identifying flaws and
opportunities, so as to create “internal” markets that optimize growth
possibilities.
Analysing such facts, it may in conclusion be stated that while all the
examined contributions have been able to explain the logical frameworks
of international development adopted by US multinationals—and of the
manufacturing sector alone—which in the 1960s–1970s were
internationalizing prevalently in the European countries, they have not,
however, been able to interpret the current international development
processes of Western companies and of companies in emerging areas
(China, South Korea, and India). They have also come up short in
interpreting the internationalization processes of Japanese companies in
the 1970s–1980s, which, although reduced in size and originating from
countries marked by a lower level of development than American ones,
were able to internationalize successfully—and specifically in the United
States.
Kojima (1978) and Ozawa (1979), in analysing Japanese companies’
first foreign development experiences, stressed that existing approaches
were unable to explain the internationalization of small-sized businesses
originating from countries that, like Japan in the 1970s, were
disadvantaged in comparison with the destination country. For the
authors, Japanese FDI followed a trade-oriented logic (sale of their
products), unlike US FDI, and sought not to protect technological
advantages but to exploit the better conditions present in the destination
countries, taking account of the host countries’ industrial policy
conditions and propensity to accept foreign capital.
It must also be stressed that the examined contributions have
somewhat neglected the effects induced by the internationalization of
foreign companies in the host countries: as knowledge, whether or not
incorporated into the goods produced, is propagated, followers can
become active, metabolize, and implement the acquired knowledge, and
become competitors of the unwitting knowledge donors. It is an example
of how established knowledge development was in post-war Japanese
companies. By importing cars and products, acquiring technologies from
foreign operators, learning the organizational-management models of
foreign companies, and filling “supply voids,” Japanese companies
metabolized the acquired knowledge and implemented it in their
organizations while adapting it to local features; in some sectors, they
became the original donors’ competitors.
For China, too, during the past decade, the acquisition of new
knowledge—implemented through the importing of machines and
licences, or induced by the presence in the area of direct investment by
US, Japanese, and German multinationals—triggered an accelerated
process of development of the local economy.
Lastly, the examined theoretical contributions have focused attention
exclusively on the objective of achieving growth in new markets, or on
that of economizing, while neglecting the fact that companies can also
have the direct goal of acquiring new knowledge, notwithstanding the
underlying objective of broadening their markets and increasing their
profits at later times. In this regard, Parmentola’s research (2008) shows
that the determinants of the creation of research centres in the United
States, South Korea, and Sweden by Chinese producers of
telecommunications systems, which are uncompetitive with foreign
 Outsourcing and Reshoring
competitors operating in China, were to be linked to the objective of
acquiring knowledge and skills able to conquer a stronger competitive
position than foreign rivals could.
Therefore, internationalization, implemented through the creation of
“cognitive windows” in areas fertile for knowledge creation, may allow
companies to have full access to innovative resources, by learning and
exploiting positive externalities that are propagated locally.
Does Dunning’s Eclectic Paradigm Help Interpret
the Determinants for Entry into Foreign Countries?
Dunning’s eclectic theory (Dunning and McQueen 1981) broadens the
motivations for internationalization set out by internalization theory,
considering not only market-seeking logic, or material and human
resource seeking logic induced by the markets’ flaws, but also the
motivations connected to other location-specific factors and to the
possibility of being able to transfer firm-specific resources abroad.
According to the eclectic paradigm, the business’s internationalization
choices are based upon the simultaneous occurrence of three types of
advantages: ownership advantages, in which the company can count on
available human capital and knowledge, intangible specificities related
to the various functions, and activities in which the corporate activity is
expressed, such as marketing, organization, information processes,
governance, finance, and international experience; location advantages,
which derive chiefly from the country-specific differences as concerns
production factors (availability, quality, price), and with regard to other
aspects, such as infrastructure, transport and communication costs, and
tax, financial, and regulatory systems; and internalization advantages,
which lead companies to internalize exchanges in the presence of the
markets’ flaws or failures. In this regard, Dunning has maintained that
acquisitions, mergers, and alliances (of the “equity” type) lead to reduced
research and transaction costs, to more widespread availability of raw
materials and locally present components, and to higher standards of
quality.
Although Dunning’s model does not appear to propose a model that
is completely new in comparison to previous ones, but, rather, proposes
a systematization of the statements present in the pre-existing literature,
5
it is still worth noting, from the economic and corporate standpoint, that
Dunning’s eclectic paradigm emphasizes, for the first time in the
contributions on internationalization theory, a concept germane to
strategic analysis: the conjoining of the internal dimension of companies
(ownership advantages) with the external dimension (location
advantages). Despite this, eclectic theory is not without criticism, and for
certain authors (Grandinetti and Rullani 1996) the approach’s main weak
point lies precisely in its eclectic nature.
In the first place, eclectic theory, which limits the mode of entry to
FDI alone, does not provide for foreign investment when there is no
market failure; it is known, however, that companies may commit
themselves to alliances to improve their competitive advantage or their
competitive position (Denekamp 1995).
Second, the paradigm justifies the choice of internationalization when
ownership advantages can be exploited, in imperfect markets where
location advantages can be achieved; however, another advantage that
Determinants of Internationalization
should be achieved at the same time is ignored: advantages of cultural
compatibility.
The query is then posed: can the ownership advantages be fully
exploited and the potential location advantages fully enjoyed in markets
culturally different from familiar ones?
The exploitation of location advantages requires levels of acceptance,
by local communities, of products, technologies, and behavioural models
that constitute the ownership advantages of the entering companies, even
if distant from local ones. But, at times, the setting’s cultural dimensions
are loath to accept differences. The local setting may develop a kind of
aversion towards accepting products whose identity makes reference, in
the consumers’ perception, to habits and customs of culturally distant
countries.
Quite often, cultural compatibility is ignored when the decision to
undertake an internationalization process is made, and there are
numerous cases of failure of the undertaken initiatives. Emblematic of
this is the case of Yahoo!, forced by the hostile actions implemented by
6 A. Calvelli and C. Cannavale
the Chinese authorities to beat a retreat, ceding to Alibaba all the
investments made in China.
Last, the eclectic model ignores a company’s internal characteristics,
factors considered to be among the essential drivers of companies’
strategic behaviour (Zou and Tamer Cavusgil 1996). On the other hand,
the company’s abilities, which condition its performance and choices,
may in turn become sources of competitive advantage, thus triggering a
virtuous circle between strategic abilities and knowledge, between
learning processes and the definition of the strategies and policies to be
pursued.
An Interpretative Framework from A Resource- Based
Perspective
The revisiting of theories from the resource-based standpoint highlights
the role of resources as determinants of strategy: they impact the choice
of the market to be entered, and influence the decision on the ways of
implementing the process.
Resourced-based theoryconsiders the company as the source of
competitive advantage (Capron and Hulland 1999): competitive
advantage resides precisely in the resources (resources and capacities)
available for the company (Barney 1991; Peteraf 1993; Teece et al.
1997).
Adopting the RBV as the perspective for interpreting the
determinants of companies’ internationalization processes allows the
strategy for entering foreign markets to be studied as a function of the
objectives that companies intend to pursue by seeking the right
combination of resources and skills: those already possessed, and those
that may be developed or exploited within the chosen target markets.
Scholars of the resource-based approach distinguish two
determinants of the internationalization processes: exploitation of
possessed resources, and the development of new resources. From this
standpoint, resources may be considered in the broadest sense, and also
include knowledge resources (Cannavale 2008).
The exploitation of possessed resources underlies the hypothesis that
this exploitation yields, for companies, positions of long-lasting
advantage over competitors.
In the development of new resources, the company tends to develop
innovative paths by exploring new resources and knowledge.
Based on the information mentioned earlier in the text, the
determinants of the internationalization of companies were analysed
through the study of multiple cases. This accords with Yin (1994, 2003),
who suggests this methodology when researchers are dealing with
situations where the number of variables greatly exceeds the number of
observations, and when the objective of the research is to understand the
causes leading to a given phenomenon. Moreover, the multiple case
approach, as it possesses sufficient flexibility, is also recommended to
reduce the uncertainty inherent to situations where the boundaries
between the phenomenon to be examined and their context cannot be
clearly defined (Yin 1999).
Based on the information given earlier, the determinants of the
internationalization of companies were analysed as a function of two
dimensions: a dimension inside the company, and a dimension outside it
that relates to the characteristics of the target market.
The internal dimension refers not only to the managers’ ability to
have material and knowledge resources, but above all to the ability to
possess “skills”; this means knowing how to combine the available
resources in such a way as to acquire greater strength, or less weakness,
than the key players with which the companies must grapple. The
internal dimension is represented by the level of competitiveness of the
internationalizing company, in comparison with the players operating on
the domestic market.
The model (Fig. 1.1) considered the competitive position of
companies in the domestic market because empirical evidence has often
shown that companies’ choices in undertaking a given international path
are a conditioning factor.
 Outsourcing and Reshoring 7
The external dimension is represented by the presence in the target
market of competitors operating in the same sector. There are two
possible situations: a strong presence of competitors contending at a level
higher than the internationalizing company; or no competitors, or a
limited presence of competitors, contending at a level significantly lower
than that of the internationalizing company.
At the intersection between these two dimensions, the examination of
the cases of the internationalization of companies has led to identifying
four determinants of the internationalization of companies.
The knowledge exploration determinant regards the search for new
information and new alternatives, in order to improve future results, and
presents a position of weakness in comparison with the competitors
located on the domestic market. The company believes that entry into the
foreign market, where competitors possessing higher-level know-how
and knowledge are present, might be useful for

– appropriating the knowledge of the competitors present in the target

market (market knowledge acquisition);

Competitive position of the company in the

– developing the knowledge needed to strengthen competitive position
in the domestic market or in the international one (strengthening of
domestic market competitive position);

Fig. 1.1 The determinants of internationalization choices. Source: Our – acquiring new resources and skills needed to innovate products and
elaboration processes, thus laying the groundwork for acquiring new advantages
The competitive position may be strong, in the case where the or for expanding the business (product/process innovation); and
company has an edge over the competitors in the domestic market; weak, – acquiring best practices that can improve management of the
if otherwise. business and the company’s organization (Best practice acquisition).
The level of competitiveness may depend on a variety of factors
connected with the type of sector in which the company operates. In
high- tech sectors, for example, the competition gap may result from the Knowledge Exploration: Some Empirical Evidence
possession of specific technological skills; in a mature, labour-intensive,
sector, such as textiles and apparel, the gap might instead be derived from
the brand’s renown, from the design of the models, or from the quality
of the fabrics.
8 A. Calvelli and C. Cannavale
Bitdefender, a Romanian cybersecurity and antivirus software
company, was founded in 2001. When they began production of
the first Bitdefender Box version, the manufacturing conditions
did not exist in Romania, and the main reason for offshoring was
for the skills offered by the host country’s employees. But
Romania has seen impressive change over the years, and
nowadays the company can find the skills it needs in the home
country; so it has therefore moved the production of its second-
generation Box device from China to a factory in Satu-Mare
(Romania) although production costs in Romania are 7% higher
than in Asian countries.
Luxembourg-based Docler Holding is a multinational
enterprise in the fields of entertainment, technology, personal
development, and luxury/lifestyle, with more than 1000
employees worldwide. Docler Holding has acquired Streamago
from the Italian Telco giant Tiscali. The core engineering and
business development activities are being established in
Luxembourg, and a branch has been opened in Sardinia in order
to support overall development. The reason for the acquisition is
the Streamago’s specialization in social networks. In effect,
Streamago is a social media platform and community that allows
its users to create and share live videos and selfies publicly on
Facebook, Twitter, Streamago itself, or privately on WhatsApp
and Messenger. It already counts more than 3.5 million
registered users, 1.5 million monthly unique users, 130 million
app launches, and around 150,000 broadcasts per day. After the
acquisition, Docler Holding intends to pursue an international
downsizing strategy: the company wishes to relocate the main
engineering and commercial development activities from Italy to
Luxembourg.
Source: Our adaptation from the European Reshoring
Monitor—April
2018
The internationalization of Chinese companies on the Italian
market seems aimed at acquiring the knowledge and competence
developed in Italy (design, high-quality production,
technological skills, the country of origin’s image and brand
reputation). Between 2008 and 2012, many Italian brands were
acquired by Chinese companies, such as:
(a) Tacchini Group, from Hembling International Holdings
Limited, which on 4 June 2007 became part of Tacchini H4T
(Hembly for Tacchini), a Chinese company controlled by
Billy Ngok, the president of Hembly
The international leadership determinant regards the case where the
International Holding Limited, one of the main Asian groups specialized in the
outsourcing and distribution of clothes, and listed on the Hong Kong stock
exchange. Tacchini was very close to bankruptcy, and the acquisition saved the
Sergio Tacchini brand, favoured by young people who appreciate the Italian
casual style. This acquisition is part of the strategy aimed at competing in the
segment of accessible luxury.
Source: Our adaptation from Il Sole24ore, 28 September 2007.
(b) Ferretti Group is a world leader in the design, construction and sale of
motor yachts and pleasure craft. The group owns prestigious, exclusive
brands including Ferretti Yachts, Riva, Pershing, Itama, Mochi Craft, CRN
and Custom Line. Internationalized in more than 80 countries, the Ferretti
Group was acquired by the Weichai Group, a player in the electrical
equipment sector, in 2012, with an investment of €374 million. The aim
was to combine industrial production efficiency with the unrivalled quality
and attention to detail of fine Italian craftsmanship, in order to obtain a
defendable competitive position.
Source: Our adaptation from Il Sole24ore, 10 April 2017.
company, which enjoys a high competitive position in the domestic
market, enters foreign markets in order to exploit the possessed resources
and skills (own resource exploitation), to try to reduce competition, and
to develop a position of leadership in the international market (host
 Outsourcing and Reshoring
country’s competition control). Many mergers and acquisitions were
implemented precisely to eliminate competitors and acquire a dominant
position on the host market.
International Leadership: A Case Study
An international leadership logic was followed by the entry of
Sonnen into the United States, with the establishment of a branch,
a development Centre, and a pilot project involving 4000 dwellings,
all networked with one another, which autonomously generate,
store, and exchange the electricity that is produced. In fact, Sonnen,
which makes smart energy storage systems for private and
commercial applications, already acquired some time ago a strong
competitive position not only on the domestic market, as it is a
market leader in lithium storage systems in Germany, but in Europe
as well, with a network boasting more than 9000 users and units
sold. The SonnenBatterie is distributed through SonnenBatterie
Centres: medium-s ized, structured companies located in the United
Kingdom, Luxembourg, Switzerland, Italy, and Austria. A recent
agreement with the Spanish company WeBatt Energia calls for the
purchase, in the first quarter of 2018, of a significant number of
Determinants of Internationalization
SonnenBatterie units. In addition to the SonnenBatterie, Sonnen’s
energy services are also expanding in Europe, Malaysia, and the
Philippines. Sonnen has also created a Community, the world’s largest
energy-sharing platform, which provides electricity to users in Germany,
Austria, Italy, the United States, and Australia.
For creating the Community, and for its pilot project implemented in
Arizona to promote energy sharing, Sonnen was for the second time
listed by Fast Company among the world’s ten most innovative energy-
sector companies.
9
International leadership in the production of hangers is the case of
Mainetti, founded in 1961, which quickly transitioned from exclusive
production for Marzotto to becoming a leader in the domestic market; it
now supplies hangers to all the major domestic apparel manufacturers.
Since the 1970s, the company’s internationalization process has
consolidated, first in Europe and then worldwide, through the creation
of its own Mainetti product marketing and production units in the local
markets (host country competition control).
To reduce competition and therefore improve its position as world
leader in hangers, Mainetti purchased such competing groups as Pendy
Plastic Products, a Dutch hanger company, from Ferguson International
Holdings plc, with manufacturing bases in the Netherlands, Portugal, the
United Kingdom, and China. To conquer the American market,
characterized by the presence of fierce competitors, Mainetti purchased
the powerful US brands RANDY HANGERS, the world’s number-five
player, and A&E, the world’s number-two player (acquired from Tyco).
A dominant position was also acquired in developing countries and in
emerging countries (Sri Lanka, Malaysia, India, China [Shenzhen],
Vietnam, Bangladesh, Pakistan, Egypt, Turkey, and Morocco) by
diminishing competition through purchases or joint ventures with
leading local hanger makers. Another example is offered by Lenovo.
Lenovo Group Ltd. is a leading global manufacturer of personal
computers (PCs). The company was already the largest PC manufacturer
in China when it acquired IBM’s Personal Computing Division in 2005
and entered the United States. Lenovo retained the right to the IBM
brand for five years, but worked quickly to publicize its own name in its
new sales territories. A restructuring followed Lenovo’s IBM purchase,
which created the world’s third-largest PC manufacturer after Dell and
Hewlett-Packard. Lenovo relocated its headquarters from Beijing to
Purchase, New York, near IBM’s home, while adding IBM’s
ThinkCenter in Raleigh, North Carolina to several manufacturing sites
in China. Plans to relocate the headquarters to Raleigh were announced
in March 2006. In 2014, Lenovo acquired the mobile phone handset
maker Motorola Mobility from Google. Since 2013, Lenovo has been
the world’s largest personal computer vendor by unit sales.
10 A. Calvelli and C. Cannavale
Source: Our desk analysis
The protection of resources determinant highlights the case in which
the company is competitively weak in the domestic market, and enters
markets where competitors are absent or possess comparatively lower
levels of skills and resources. It refers to the possibility that companies
might wish, through internationalization, to protect their tangible and
intangible resources.
In particular, the choice of entering a foreign market is often dictated
by the need to
– imitate competitors, so as not to be at a disadvantage in terms of
costs, in the case in which one or more competitors, by
internationalizing in a given market, have reached higher efficiency
levels (imitation);
– follow their customer or supplier in order to defend the advantages
of the inter-organizational relationships that have been created
(maintain relationship); and
– attack a market where companies can better exploit their own
resources due to the absence or limited presence of competitors with
lower competitive potential, also in cases in which demand is still
latent (Market gap).
Protection of Resources: A Case Study
During the 1990s, many Italian textile SMEs offshored their
activities. For companies producing à façon, competition from
emerging economies was becoming stronger and stronger, and
the need to maintain relationships with clients was one of the
main reasons for internationalization. From the perspective of
protecting resources, these SMEs looked to offshoring as a
possibility to reduce production costs and preserve relationships
with clients interested in keeping purchasing costs low. Many
firms moved to Tunisia, where industrial textile firms were
established. This district is characterized by many small Italian
firms that have completely substituted Italian activities with
Tunisian ones, joined by large firms as well. Small firms operate
mostly with a view to protecting resources, by trying to keep
clients on the one hand, and to find a way to escape the
disadvantages of little- known or absent brands on the other.
Small South Korean manufacturing companies, which
followed the large companies from their own country that
internationalized in regional clusters in China, were motivated by
a protection of resources logic. In fact, small “follower”
companies were able to more easily exploit access to raw
Determinants of Internationalization
materials or to intermediate products, thereby also reducing the
uncertainty connected to entry into unfamiliar areas. This is in
line with the results of the research by Debaere et al. (2010),
which show that geographical proximity can lead to technology
or knowledge spillover. Moreover, the presence of suppliers and
customers in the same area may lead to building relationships up
and downstream, thus reducing procurement and sale costs.
Another example is offered by Maritan, a family-run shoe
manufacturer founded in 1995. After a few years, increasing
competition and the pressure to cut costs led the owners to move
to Romania, following the 430 Italian SMEs already located there
and operating in different but complementary industries. Some
years later, the firm made another investment in Moldavia.
Thanks to these investments, the firm has saved its business, and
even improved it. Today, it produces for a host of major Italian
brands, but also sells products under its own label. Source: Our
desk analysis
 Outsourcing and Reshoring
Lastly, the resource-seeking determinant highlights the case in which
the company is competitively strong in the domestic market and decides
to enter where the presence of competitors is lacking or limited. It bears
noting that, from the resource-based perspective, resources are
considered in the broadest sense of the term, including not only
intangible and tangible resources (productive resources) but also those
that companies may acquire by exploiting the market potentials for
selling their output (market resources). The resource-seeking
determinant appears to reflect the case of companies entering
uncompetitive markets, or markets in which competitors lack skills
distinctive enough to constitute a threat, precisely for the purpose of
maximizing the benefits that may stem from their competitive position,
thus also creating, in the foreign market, a market for their own output;
this is the case of small, high-tech companies that patent transgenic
molecules and internationalize in strongly agricultural markets where the
presence of agrifood enterprises constitutes a potential demand for a
product that, although technologically advanced, still finds application in
a traditional sector. This case would also include the internationalization
process of engineering companies or of engineering offices that decide
to enter Eastern European countries to exploit the advantages derived
from growing infrastructural demand and the lower preparation of local
technicians.
The following are some of the reasons that may underlie the choice
of internationalization: concentrating on exploiting country-specific
factors (local factor exploitation); selling own products/services on the
target market (host market control); reducing logistical costs; creating
onsite centres for stocking raw materials or finished products, if the
target countries are closer to the procurement or distribution markets
(logistics cost savings); and reducing tax burdens, by setting up
associated companies or central offices in target markets that offer more
limited taxation (tax charges saving).
Resource Seeking: A Case Study
11
Safilo Group S.p.A. is an Italian company that designs, produces,
and distributes prescription frames, sunglasses, sports eyewear, ski
goggles, ski helmets, and cycling helmets under its own five house
brands and 22 licensed brands (8108 employees). Their products
are manufactured primarily in three Italian facilities with an
additional European plant in Slovenia. The company’s
internationalization in Slovenia, initially in family markets,
responds to a logic of economizing.
Adidas is a well-known German company specialized in sports
footwear. According to official data, the company employs more
than 50,000 people worldwide. Throughout the 1980s, large
portions of the company’s production was offshored to third-party
external suppliers in China, where Adidas now employs around one
million workers. The determinant of internationalization was the
exploitation of lower labour costs. One of the company’s major
competitors, Nike, recently decided to produce shoes using a
robotized system. Adidas has followed a similar strategy, bringing
production back from Asia, and opening its first robotized plant in
Ansbach, Southern Germany. The company also plans to establish
a Speedfactory in the US in 2017. Bringing production back from
China and Vietnam will help the company offset long shipping
times and rising labour costs in Asia. It will also help meet the
demand for rapid innovation in designs and styles.
Source: Our adaptation from European Reshoring Monitor—April
2018
2. International Strategy
A Key to Interpretation
The strategies of companies competing in an international setting have
given life to a current of studies that have, now and in the past, been
seeing growing interest on the part of scholars in the economic and
corporate disciplines.
In a complex and continuously evolving environmental system, and
in a landscape of markets that are increasingly contestable and thus more
exposed to the entry of potential competitors (and from other sectors of
the economy as well), a company’s competitive advantage depends in
12 A. Calvelli and C. Cannavale
large part not only on the strategic choices it makes in order to seize the
opportunities originating from the customers’ market or to defend itself
from the threats of competition but also on its managerial capacity to
create competitive and collaborative relationships with the suppliers of
factors and technologies. Success also depends on a company’s ability to
diminish, in assessments of potential entrants, the attractiveness of the
businesses by raising barriers to entry. This assumes a marked ability of
managers to abandon old paradigms and to replace them with new ones
able to create the conditions for the company’s strong interaction with its
environment, aimed at generating, selecting, and governing the variance
of relationships (Lorenzoni 1990).
It is first necessary for managers to have a strategic vision of the
actions to be undertaken, and to be able to formulate strategies well
defined in their confines of space and time, with objectives consistent
with the quantity and quality of the resources present in the organization
or that can be acquired from the outside. A strategy, then, must be
understood as a decision-making model suitable for coordinating, in
accordance with a coherent, orderly vision, the company’s objectives,
lines of behaviour, and allocation of resources; it plays a role of
mediation between the opportunities and threats generated in the external
environment, and the resources and skills that are possessed.
Therefore, the strategy’s formulation must be based on two elements:
the strategic analysis of the environment from which the identification of
the business opportunities to be seized derives, and the managers’ ability
to use and combine the possessed or controllable resources and to acquire
the resources needed to pursue the strategic objectives.
Hence, in identifying the optimal relationships that companies must
implement with the forces of the competitive setting, the possessed
knowledge and skills come into play; the more these skills complement
one another, and the more they cut across a company’s value chain, the
more the foundation is laid for a more lasting and defendable advantage.
From the perspective of an RBV, the role of resources and knowledge
in formulating strategies takes on a meaning different from that of
previous currents of study. The strategy is not formulated to allocate
resources from a perspective of adapting to the market’s opportunities;
its purpose is to leverage current and potential resources to create
competitive advantages and opportunities for growth.
The earlier given statements, then, allow the defining confines of
development strategies to be identified: the theories and paradigms of
dimensional development strategies, which include internationalization
strategy, are aimed at defining the instruction (what to do, where to go),
intensity (levels of the targets to be reached), and direction (positive or
negative) of the companies’ growth vector.
International Strategy
The strategy’s formulation must allow managers to identify the
possible markets based on the skills and knowledge required and
possessed. In a second phase in the strategic process, the examination of
the rules of the competitive game, which are characteristic of the chosen
markets, can guide managers in defining the policies to be followed and
the modes of entry to be implemented 1 for the very success of the
strategies to be undertaken.
Logic dictates that it is necessary first to define the lines of strategy
to be pursued, and then to identify the procedures for implementing them
that can best reduce the times for putting strategies into practice, or that
can allow the strategic objectives to be achieved more efficiently
But clearly, in a unitary vision of the strategic process that must guide
the entrepreneur in pursuing his or her choices, internationalization
strategies and the procedures for implementing them are closely related
problems. Modes of entry condition the strategic decisions of
 Outsourcing and Reshoring 13
international development; this also derives from the consideration that, Companies undertake internationalization strategies when they
at times, modes of entry cannot be chosen freely by managers, both decide to enter new markets for their output or for the acquisition of
because they are imposed by foreign countries, and because they are inputs,
subject to the portfolio constraint of the corporate resources. Core Factor Development
The interrelationship between strategies and modes necessarily leads
to circularity in the decision-making process, by which strategic choices
are monitored and assessed—through a path by “successive Discontinuous Continuous
approximations”—on the basis of trialling one of the possible ways to
implement the strategies. The results of the experimentation are thus
parameters for assessing the ability to pursue, over time, strategic
International International
objectives determined a priori.
Positive sum Diversification Expansion
The Role of Core Factors in Development Strategies
Following information given earlier, we can conclude that a growth
potentially winning formulation of the strategy must clearly be based on
a careful analysis of both the dynamics within the company, and of
outside dynamics, in order to identify the critical issues to be dealt with, Negative sum International Re- International
the market/ product segments in which to operate and, above all, the best growth Zero sum focusing Downsizing
allocation of possessed or acquired resources, whether tangible in nature growth
or connected with knowledge (knowledge resources).
Therefore, the expansion of the managers resources and skills enters Fig. 2.1 Internationalization strategies. Source: Our elaboration
into play in strategic choices, and is often necessary for defining strategic International Strategy
objectives. The more distant the rules of the game in the new and to expand into already familiar foreign markets. Decisions that
environments being competed in are from those of the settings in which companies formulate in order to reduce their foreign presence, to
the businesses already operate, the more this is perceived. abandon the foreign markets in which they operate, or to replace them
By focusing attention on the resources and skills possessed by the with more attractive markets, may also be considered internationalization
company that have been defined overall as “Core Factors,” and on the choices.
changes in the wealth of Core Factors that must necessarily be generated In “expansion” processes, even if the business activities are
when this is required by the strategies to be implemented, a general developed in familiar competitive settings, it is realistic to suppose that
picture of the various internationalization strategies that companies may an increase in management’s knowledge base may be achieved, both as
potentially pursue can be provided (Fig.2.1). The perspective pertains the premise for obtaining growth and as a natural development of the
only to the companies’ development strategies, since internationalization knowledge moving in parallel with the company’s expansion path.
strategies always presuppose the development—positive or negative— However, it does not appear necessary to suppose, in this case, an
of the companies’ size (organizational, productive, and financial). acquisition of new knowledge resources aimed at transferring, to
company management, technological and market knowledge
14 A. Calvelli and C. Cannavale
significantly different from that already possessed. Lastly, the expansion
strategy may require, in cases in which the company continues to remain
within the same competitive setting, a mere reorganization of the already
established wealth of knowledge and skills, in order to achieve a greater
use or more efficient and effective exploitation of the available
knowledge resources.
In the perspective of internationalization, the start of a process of
foreign expansion into competitive settings that are familiar yet
geographically different may be likened to an expansion into domestic
settings (the case of internationalization for expansion). This strategic
type may be realistically supposed to include the choices of acquiring
productive factors on the foreign markets, and of offshoring production
in foreign settings that are not significantly distant from familiar ones.
International Strategy
On the other hand, new core factors are need to place corporate output
into settings culturally distant from familiar ones, or into new markets
having significant different competition rules derived from the joint work
of the five forces of competition. In these cases, the international
expansion strategy becomes, in an outlook of discontinuous positive sum
growth of the Core Factors, a diversification strategy
(internationalization for diversification).
The modes of implementation of internationalization strategies for
diversification include the choices of productive offshoring or the
outsourcing of production to international third parties when the foreign
localization market has cultural features and entrepreneurial behaviour
significantly different from familiar ones; in these cases, it is necessary
for the company to acquire in-depth knowledge of the markets if it wishes
to pursue an objective of stability and efficiency of the activities that are
undertaken. Many environmental factors, which are considered constant
in the domestic market, become variable, and companies may encounter
cultural, social, political, and economic differences that are so great that
the decision-making policies implemented within the habitual confines
become inapplicable and the very modes of acquiring information and
knowledge may also change significantly. Moreover, the sources of
technological, organizational/managerial, and market knowledge expand
in cases where, upstream or down, the company’s
production/distribution cycle lengthens, and the strategic choice of
internalizing new activities is, in the proposed interpretation key,
included in the diversification strategies.
International diversification can be concentric and conglomerate in
accordance with how new and different resources and skills acquired by
the company show synergies with the pre-existing resources and skills
(concentric diversification), or present no connection with them
(conglomerate diversification).
International diversification strategy: An example
Founded by Carlo Stradi and Alberto Campanini in Parma in 1992,
Custom SpA is an Italian group involved in the production of cash
machines, ticket issuers, and bills, and had several companies abroad.
The group has a large international presence, obtained through a
diversification into six main markets: Boarding passes and bag tags,
phones, smartphones and apps, gaming, lottery and betting, PcPos &
PCPos and cash registers, professional devices for self-industries and
ticketing, and entrance into very distant markets. Custom Group
owns branch offices all around the world: five branches in Europe
(Germany, Russia, United Kingdom, Ireland, and Romania), eight
branches in Asia (Indonesia, India, Philippines, Thailand, Singapore,
and China), five branches in Oceania (Australia and New Zealand),
two in South America (Brazil and Argentina) and one in South Africa
and one in the US. Profits have grown considerably during the year,
and Custom SpA is now a leader in the production of integrated
solutions for retail and professional markets.
Source: Our adaptation from European Reshoring Monitor—April
2018
 Outsourcing and Reshoring
Internationalization for diversification is often motivated by the need
to monitor the behaviour of markets, productions, and sectors (opening
of cognitive windows), in order to seize the opportunities that may
emerge locally.
The concept of “cognitive window” has been understood to include
the types of windows (creating related enterprises abroad, research
centres, etc.) companies open in the areas of strategic relevance, in order
to learn the prevailing market mechanisms (market windows), or to learn
about and more easily appropriate, through continuous monitoring, the
innovative technologies being developed in given environments
(technological windows). Moreover, since the process of broadening
competitive horizons is a given in modern business economies,
completely abandoning expansion beyond domestic borders reduces the
ability to withstand the market in cases where the demand for one’s
products shows situations of crisis, and yields fewer opportunities to be
seized, due to “non- knowledge,” should these opportunities arise on
foreign markets. Conversely, managerial responses can become more
effective as available knowledge grows with regard to the changes that
are about to take place in the environment settings chosen for monitoring.
Opening cognitive windows thus means being present on the frontier
of knowledge, and acquiring the possibility to act before competitors do.
In this sense, internationalization might also be implemented to pursue a
“pre-emptive strategy” (MacMillan 1983)—as a move to stay a step
ahead of “potential” competitors—aimed at being the first entrant into a
new market for which the company supposes it possesses a capacity to
meet latent or unmet demand.
To acquire better competitive positions and undertake actions
suitable for change, it is necessary to learn, to acquire information, and
to know how to interpret it, especially when wishing to operate in
international settings. The thrust to international expansion of modern
companies originates precisely from the baggage of experience created
through the development of the knowledge process.
It may therefore be stated that in situations in which companies learn
through experience or through a process of relational exchange with
15
actors possessing different knowledge, which is to say almost by
capturing the experiences of others that provide learning opportunities,
the foundations are laid for a self-propelling process for generating and
using knowledge. This process instructs and directs the vector of
companies’ international growth.
Going on to examine the zero or negative sum development processes
of the pre-existing core factors, in a strategy of “recentring”—carried
out, as is known, by eliminating business activities unattractive for the
company or its market—it cannot be realistically supposed that a strategy
of this kind involves bringing into the company resources and skills that
are new and significantly different from pre-existing ones. However, to
the contrary, it is realistic to suppose that along with the discontinued
businesses, the resources and skills connected to them are abandoned as
well.
From the perspective of internationalization strategies, recentring is
implemented when companies abandon certain foreign markets in which
it is difficult to compete with the resources and skills possessed or that
may potentially be acquired, or are forced to abandon a market due to
hostile regulations in the host countries (these cases may be defined as
internationalization for recentring).
Since the late 1980s, we have witnessed, especially in the United
States, a revisitation of business strategies, aimed at “dismembering” the
conglomerates and at reallocating the resources thus freed to the core
activities: we have in fact seen manoeuvres of divestment and, often, of
investment at the same time in familiar or correlated activities. Major US
enterprises have thus substantially modified their development
trajectories and, in recent decades, corporate demergers, implemented
through breakup or spin-off processes, have increased at a fast clip; this
went against the forecasts prevailing in the 1980s, which saw the
recentring strategy as an alternative more suited to smaller companies or,
at most, to new entrants into competition.
On the other hand, the organizational downsizing processes of US
companies are in many ways a natural consequence of the strategies of
excessive diversification carried out in years past. In this regard, it is
16 A. Calvelli and C. Cannavale
known that a development path without a unitary strategic design, or
projected towards the continuous search for the new, may be a hazardous
choice that can lead to the rise of diseconomies of coordination,
distortion effects in the resource allocation mechanism, non-
reproducibility of uncoded managerial skills concentrated in top
management with a strong entrepreneurial characterization (Cainarca
and Mariotti 1985), and even the business’s failure altogether.
The strategy of recentring or refocusing leads to concentrating the
field of action on the core, by liquidating both the activities that have no
reason to exist due to crises of demand or of inefficiency (pruning the
dry branches), and those not strictly related to the company’s central
activities. In the first case, treated more widely by the economic/business
literature, the strategy is aimed at resolving critical situations and, in this
sense, is configured more appropriately as a survival strategy. In the
second case, a recentring strategy, being aimed at refocusing
management’s attention on the central activities, over the long term
speeds the growth process of strategic creativity.
Internationally, in recent years, international recentring strategies
have involved many companies that in previous years had undertaken
internationalization strategies in potential outlet markets or in markets
rich in factors (cheap labour, raw materials): recentring in familiar
markets or in
more attractive markets has often been imposed by hostile behaviour in
the host countries, by the emanation of conditioning legislation, or by
reduced advantages of cost.
International Downsizing Strategies. Some Empirical
Evidence
Plasto AS is located in Åndalsnes (Norway). It delivers a wide
range of plastic products to many different industries, whose
demands and requirements are quite diverse. Considering price,
technology, proximity to market, and to improve its ability to
develop new products and technology, Plasto AS moved its total
manufacturing activities from China back to Norway. Now
production is completely automated with robots, and production
can run 24/7, says Lars Stenerud, the CEO of Plasto.
Kapsys is a French company founded in 2007 in Mougins,
France. This company has become an expert in the fields of
embedded intelligence and voice technologies, designing and
selling digital mobility and communication devices for seniors
and the visually impaired. Kapsys has decided to relocate the
production of its second-g eneration SmartVision mobile phone
from China to France due to problems of distance, transport, and,
above all, quality. Since the production line was relocated,
production activities have been conducted by BMS Circuit—an
electronics subcontractor based in Mouguerre (Bayonne), France.
Circuit hopes it can repeat the experience and produce new
smartphones for older people in France, and plans to do so in the
summer of 2017. In addition, Kapsys attempts to protect the
SmartVision 2 software and avoid the risk of being copied or
corrupted, as installation activities would have been carried out
by Kapsys itself rather than its service providers in China. This
strategy aims at higher control over design, development, and
manufacturing. Meanwhile, relocating production activities back
to France will facilitate communications between Kapsys and the
production unit, and offer customers more flexibility and
responsiveness.
Dinbox is Sweden’s largest supplier of mailboxes. Its product
portfolio also includes other metal products like lockers, benches,
and cloakroom furnishings. In 2018, the company decided to
move its total production activities back from China to its new
plant outside Stockholm. The decision to relocate was taken after
purchasing an automated machine that produces up to ten times
more than any other one in the past.
I.P. Huse AS is located on the island of Harøy (Norway), and
the company has approximately 130 employees. It is the world
leader in designing and manufacturing large winches for anchor
handling vessels (AHTS). According to the project manager
 Outsourcing and Reshoring
Håkon Heieraas, the company has moved total production back
to Norway from Ukraine, Poland, Russia, and the Czech
Republic. I.P. Huse has made large investments in production
facilities in Norway, to increase its production capacity. With
mechanization and robotics, the company had the opportunity to
obtain benefits in terms of economy, quality, and lead time.
Source: Our elaboration from European Reshoring Monitor—
April 2018
Lastly, if the strategies involve a discontinuous, negative or zero sum
increase of the core factor, this means that the company is implementing
re-focusing strategies that entail the company’s full-blown strategic
repositioning. In this case and, generally, following situations of sectoral
crisis or of inability to compete profitably on certain markets, the
company abandons certain markets and replaces them with more
attractive investment opportunities that require new resources, and above
all knowledge resources, in place of those related to the discontinued
operations or to the abandoned markets.
International Re-focusing Strategies: Some Empirical
Evidence
Marklin is a German producer of toys, famous for producing
locomotive models. In recent years, the company has adopted a
cost-saving strategy, which involved offshoring and relocation
to China. However, in 2015, the company re-shored to China and
invested in a plant in Gyor (Hungary) in order to near-shore
production.
Jabil is a US company founded in 1966 that designs and
produces electronic components. In 2017, it decided to transfer
some of its production from China to Poland. More specifically,
manufacturing activities were moved entirely to the Kwidzyn
plant, located in the Pomerania region which is recognized as one
of the most important Polish industrial cluster for the electronic
17
industry (20,000 people work there). Before relocation, over
3000 people already worked in the Jabil plant, and further 600
ones will be enrolled. New jobs will manage the relocated
activities and the increasing demand deriving from new
customers.
The Neuman Aluminium Group, a medium-sized company, is
specialized in the development and production of high-quality
aluminium parts. The group—which is headquartered in Austria
and wholly owned by CAG Holding (Austria)—has
manufacturing plants in ten locations in Europe, North America,
and Asia. CEO Christopher M. Braathen says that “initially, the
group was considering relocating production from China back to
a lowcost country in Europe. However, in the end the Austrian
holding company decided to locate production in Norway,
considering Norwegian efficiency and extensive use of
automation as well as the local expertise available in the
industrial cluster of Raufoss”.
Source: Our elaboration from European Reshoring Monitor—
April 2018 International Strategy
Thus analysed, the interaction between strategic choices and the
wealth of resources and skills is framed in a dynamic vision of the
strategic action of managers, and identifies the existence of a circular
relationship between two phenomena: the possessed core factors
influence the company’s strategy which, in its turn, tends to modify the
accumulated wealth of core factors. A virtuous circle thus takes shape,
which feeds and increases the strategic options available to the company.
Therefore, from a dynamic perspective, the strategic decisions thus
adopted, through the environmental filter that decodes and directs the
company’s behaviour, may impact future decisions.
Internationalization for Diversification:
The Risks of Extreme Diversification
Research on the theme of international diversification, which in the
1960s had concentrated on the theme of conglomerate development, has
18 A. Calvelli and C. Cannavale
focused attention in recent decades on concentric-type geographic
diversification, which is to say on situations in which the development
of business activities is carried out in the context of a relatively
homogeneous cluster of countries. In cases of internationalization for
diversification, the companies that operate in relatively homogeneous
clusters of countries have, in statistical terms, more opportunities to
achieve more stable profits (Vachani 1990), by optimally exploiting their
baggage of knowledge.
In a strategy of internationalization for concentric diversification,
technological and market synergies are created: when the entrepreneurial
formula is replicated abroad, as Nike, for example, implemented when
progressively entering the various sport activities (basketball, cycling,
football, golf, etc.); when entering into new markets significantly
different from familiar ones, with existing products (technological
affinities); when activities in the value chain in “non-familiar” settings
are offshored.
On this topic, Grant (1987) stated that multinationals operating in
psychologically close countries bear lower coordination costs and can
also draw benefits in terms of economies of scale and spillover (Daniels
and Radebaugh 1989).
Although in the early 1960s, Hymer (1960) had already stated that an
important role in the theory of multinationals was played by the
companies’ ability to possess an oligopolistic wealth of intangible assets
(ownership advantage) that allowed them to compete in unfamiliar
environments, only later research highlighted this assumption in a
significant way. The conclusions of the empirical analyses performed on
the issue emphasize the connection existing between the level of
similarity of the clusters of countries where multinationals operate and
companies’ ability to use the possessed wealth of invisible assets to their
advantage.
For Teece (1986), physical proximity encourages affiliates to activate
mechanisms of exchange of technological knowledge that can more
easily be codified; in that way, companies can pursue the objective of
achieving higher levels of productive and commercial efficiency,
through the economies of purpose that are obtained when new resources
and skills are synergistically correlated with pre-existing ones.
Proximity, and above all cultural proximity, may also allow
companies to more easily standardize certain functional policies and
activities, such as those of marketing, and therefore to reduce the costs
and complexity of managerial operations (Buckley and Casson 1976;
Ronen 1986).
Turning to examination of companies’ international growth
processes, from a perspective of conglomerate diversification, it is in the
first place to be noted that a strategy of this kind cannot guarantee, in and
of itself, the survival of companies on the market, and this is for two
categories of reasons.
In the first place, the managers’ knowledge needs increase with entry
into new markets, the more distant they are from the familiar ones. As
distance grows, the uncertainty perceived by the managers, and the com-
panies’ exposure to risk, grow as well. In this sense, uncertainty refers to
the managers’ ability to make conjectures as to the impact the actions to
be undertaken have on the companies’ performance; it depends on the
conditions of a country’s political stability, the higher (negative)
fluctuations that can characterize the area’s economic and social
dynamics, and the diversity of beliefs and values that can keep strategic
objectives from being achieved.
In the second place, high levels of uncertainty create a situation of
inertia in managers and accentuate the opportunistic purposes that, in the
long run, lead to the failure of policies, established a priori, of penetrating
into markets. Numerous research works have been done on this topic,
focusing on the role that uncertainty can play in the failure (or in the
change) of the purposes that managers intend to pursue by establishing a
system of competitive or collaborative relationships with foreign
partners (Wernerfelt and Karnani 1987; Miller 1992, 1993).
It also bears noting that entry into markets considerably different
from familiar ones can generate the same danger as diversification in
independent businesses. In this regard, the reduced risk derived from
fractioning the overall company activity into a number of independent
 Outsourcing and Reshoring
businesses finds its limit in the greater risk generated with the entry into
new activities for which no distinctive skills are possessed. This also
takes place in cases in which internationalization is carried out through
mergers and acquisitions, due to the uncertainty connected with the
successful outcome of the coordination to be implemented at the
managerial level among the bodies of the acquiring and acquired
business units.
Other dangers emerge from an internationalization for diversification
when, for the management of new markets, the company decides not to
take on new human capital. For example, the greater attention required
in developing new activities may lead to removing existing resources
from established activities, making it more difficult to maintain the
competitive positions attained.
Nor, among other things, does the entry into the company of bearers
of new knowledge needed for development into new areas of business
ensure, in and of itself, their integration with the managers already
present (Vicari 1989). The conflicts generated by the clash of
significantly different skills may, in the long term, be reflected in the
overall business activities, thereby creating the premises for lowering
performance levels, even of already consolidated businesses (Calvelli
1995).
Moreover, a continuous expansion into non-familiar markets leads
necessarily to an increased number of exceptions that may be found in
performing the work, and to a greater effort in seeking solutions to
problems that cannot be analysed, as they are connected to skills that are
found in the initial phase of the learning curve; this hinders routine
development and reduces management’s possibility of coordinating
corporate activities efficiently and effectively.
Lastly, diversification in countries culturally distant from familiar
ones requires an ability to grasp the weak signals on which light may be
cast only through careful analysis of the cultural characteristics of the
host countries, and of their impact on the behaviour of companies and of
the local authorities.
19
Some ICT firms left China due especially to hostile actions by the
host government; the case of Yahoo! is emblematic.
The Risks of International Diversification: The Hostilities of
Host Countries
Yahoo!, founded by some Stanford University students in 1994,
is an Internet services provider serving the business and
consumer world. Known mainly for its function as a search
engine, it also offers market communication (mail, messenger,
and chat) and media services.
The Beijing office originally handled Yahoo’s services in
China, but after the obstacles put in place by the Chinese
authorities, Yahoo! was forced to close down all operations,
including the web portal, e-mail service, and music streaming.
In 2005, Yahoo!’s local activities were transferred to the
Chinese e-commerce giant Alibaba; however Yahoo! had
purchased 40% of Alibaba for US$1 billion. Relations between
the two groups grew tense in 2010 when Yahoo! lent its support
to Google in its protests against censorship in China and, in 2012,
Yahoo! halved its stake, selling 20% (US$7.1 billion) to Alibaba.
In the meantime, the Beijing office had been converted into a
research centre. Currently, Yahoo!’s decision is to close the
Beijing office (350 employees), its only foothold in the country.
Even though, in Yahoo!’s telling, the closing is not linked to
the hostilities shown by the Chinese authorities but is aimed at
“promoting greater cohesion and improving the innovation
processes in all our activities,” it may realistically be stated that
internationalization in China has never been obstacle free.
The increasingly popular watchword in China is “wangluo zhuquan,”
or “cyber sovereignty”—a closer Internet monitoring achievable through
the creation of two new bodies: the Central Leading Group for
Cybersecurity and the State Internet Information Office. The former is
charged with overseeing and developing “national strategies,
20 A. Calvelli and C. Cannavale
development plans, and the most important policies,” and the latter with
transforming them into law and enforcing them.
In addition, a new bill requires ICT firms operating in Chinese
territory to store user data on servers located within the People’s
Republic of China, and to guarantee the local government’s access to
their software’s source codes. Knowing a program’s source code allows
all or part of an IT system’s security procedures to be circumvented, and
therefore makes it possible to violate its memory and to access
confidential data.
The formulation of all these new rules led the European Chamber of
Commerce to put out a press release stating that the People’s Republic
is slowly turning the “internet into an intranet.”
In brief, if foreign firms, and especially those from the United States,
wish to take advantage of the opportunities offered by the Chinese web,
they will, by necessity, have to comply with local law; otherwise, they
will be “forced” to abandon the market.
In this regard, in recent years, a great many foreign ICT companies
other than Yahoo! have left China or have announced they will be
leaving the market: Microsoft has announced the closure of two factories
in the country (9000 employees); Adobe Systems has closed a research
centre, and Zynga, a specialist in games for social networks, has closed
its office that employed 71 people.
Conversely, Chinese ICT competitors are continuing to grow; at the
end of 2014, high growth levels were recorded by Bat, Baidu (search
engine), Alibaba (e-commerce), and Tencent.
Source: our elaboration from EconomyUp, Il Sole24ore, Yahoo!
Teknotherm has a history dating back to 1926 as a designer,
contractor, and manufacturer of high-quality refrigeration systems
(Number of employees: 69 in 2014). The head office of Teknotherm is
in Halden, Norway. The strategy of this company is to be the preferred
supplier of HVAC- and refrigeration systems for marine and offshore
installations. On 26 November 2015, Dutch company Heinen & Hopman
has bought 60% of the shares of Teknotherm Marine AS. The deal
includes the subsidiary companies in China, Poland, Turkey, Sweden,
and Tromsø, Norway. The internationalization in China has pursued the
objective of reducing costs. In 2016, Teknotherm has decided to relocate
the production of electronic components for refrigerated seawater
systems from China to Halden, Norway. The relocation decision is made
based on an assessment of costs, quality, exchange, delivery, and more
efficient production in Norway.
Iccab is an Italian apparel company (with 300 employees), well known
for manufacturing the “Marina Militare” (Italian Navy) brand. The
company is outsourcing production to third-party Chinese suppliers to
reduce costs, but Panerai, the company’s owner, stated that changes in
the dollar/euro exchange rate have created extra costs for imports from
China. Other reasons for the repatriation included the high quality of
production in Italian industrial districts, and loyalty to the home country.
In 2013, as little as 20% of production for the luxury French
jewellery producer Mauboussin (350 employees) was carried out
in European countries. The majority was outsourced to producers
in China, India, and Thailand. The offshoring governance mode
was third party—external suppliers. However, since 2016,
following several rounds of backshoring and nearshoring (to
Italy), almost 85% of production for the company has been done
in Europe, and more than 40% in France. Moreover, the share of
production in France is expected to increase to 50% by the end of
the year.
Alain Nemarq, the company’s chairman, stated that producing
company goods in Europe is approximately 10% more expensive
than in Asia. However, higher costs are offset through benefits in
terms of product quality, less time lost in logistics, company
image, and country of origin image. New labs have been set up
in Paris, Lyon, and Alsace, as well as in Italy. Although the
quality of Mauboussin’s products has not increased as much as
expected, time lost in logistics has been greatly reduced.
Broadnet Telecom Inc. is Norwegian wireless and fibre-optics
solutions company, with 360 employees. The company’s mission
is to deliver worldclass products, services, and systems to
customers in three major markets: Mobile Networks, Enterprise
 Outsourcing and Reshoring
Networks, and Government Communications. Broadnet
outsourced maintenance tasks of the Norwegian emergency
communications network to the Indian IT services provider Tech
Mahindra. However, Broadnet discovered that Tech Mahindra
had more extensive access to the Norwegian emergency network
than had been foreseen, and because of this issue, it decided to
move the entire operations of the emergency network and
maintenance of the infrastructure back to Norway.
Source: Our adaptation from European Reshoring Monitor—
April 2018
The advantages inherent to the processes of internationalization for
diversification, in culturally distant competitive settings, have, based on
the failures seen in the past, led to privileging development strategies in
markets close to domestic ones, aimed at seeking the synergistic
advantage that derives from being able to transfer the knowledge and
skills already acquired to new competitive settings. It follows, then, that
development towards activities that companies know how to handle can
become one of the fundamental requirements for achieving business
excellence.
Also underlying the experimental studies by Rumelt (1974), albeit in
“soft” form, is the concept that diversification leads to comparatively
higher performance if the areas of business in which the company
diversifies present activities correlated with one another in terms of
destination towards similar markets and use of the same distribution
systems, employment of related technologies, or development of
analogous research activities.
Analysing the given information, it may be stated, in keeping with
the thought of certain authors (Copeland et al. 1991), that the search for
activities and markets to enter may be considered as the search for
activities that can create added value, which is to say activities able to
make a strong contribution towards creating value for the company.
Standardization Versus Adaptation
21
On the macroeconomic level, globalization is understood as the
interconnection between markets, and interpreted as a process of
economic, political, and cultural convergence among countries. But on
the micro-economic level, the authors focused their attention on studying
global strategies. Therefore, the issue to be discussed here is whether
globalization is a new paradigm of internationalization strategies, or a
new way for companies to organize structures and resources to obtain
more advantageous competitive positions on international markets—
which is to say a new way to define the policies for implementing
international strategies.
The strategies of companies competing in a global perspective have
given life to numerous currents of study that, now and in the past, have
been receiving growing attention on the part of scholars in the economic
and corporate disciplines. Despite the wide range of theoretical and
empirical works done on this issue, there is no simple reference to
paradigms able to provide univocal and non-ambiguous interpretations.
The concept of global strategy established in the literature (Porter
1996; Bartlett and Goshal 1989, 1998), called “pure” by Rugman and
Hodgetts (2001), presents both a high economic integration between the
activities large international enterprises carry out in the various settings
and companies’ low level of interaction with the specific local
environmental conditions.
It emerges from this conceptual model that companies’ international
development strategies take on global scope when the “modes of
implementation” are aimed at achieving two objectives:
– The homogenization of the value chain activities deployed in
different settings, which assumes the international transferability of
managerial practices and behaviours, and the existence of a
uniformity of lifestyles and consumption models
– Centralized coordination of the activities along the nodes in the
international supply chain, which assumes the search for a spatial
specification of activities, aimed at seizing the comparative location-
s pecific advantages
22 A. Calvelli and C. Cannavale
However, the objective of homogenization, in which global strategy
focuses more on processes, products, models of behaviour, and
managerial practices to be standardized, supposes the existence of an
abstract and to a certain extent utopian world without those regulatory,
cultural, and socioeconomic barriers that actually create non-uniformity
and different levels of acceptance of diversities. The levels of acceptance
by local communities of significantly different behavioural models,
beliefs, and values may be lower; locally, a sort of aversion may arise
towards accepting products whose identity, in the consumers’
perception, calls to mind the customs and habits of psychologically
distant countries.
The ethnocentric hypothesis—which in the past had led large
companies, especially those in the United States, to believe that
managerial activity could be based on universally valid principles and
that managerial practices could be successfully exported to economies
in different settings—has been critically revisited in more recent years:
specific local conditions have required increasingly differentiated
managerial styles, mechanisms for governing business activities, and
products.
The existence of a universal product has also been much debated in
the economic and corporate literature, and the results arrived at for the
most part reject it. Although modern reality is marked by a broad
mobility of individuals and a wide international spread of knowledge,
there are needs, customs, and lifestyles linked to history and to
established practice, not only of individual countries but also of
individual territorial areas in the same nation, that have such deep local
roots that they are difficult to change; they are integral parts of the
cultures and traditions that still differentiate societies and individuals in
spite of globalization.
The universal product therefore appears to be configured as a
“simplistic and illusory image of the globalization process, as a ‘myth
destined to survive only for a brief season’” (Grandinetti and Rullani
1996).
It is thus not the trend towards globalization, in and of itself, that
generates uniformity of demands, but rather, and for certain types of
goods, the pressures generated by supply through the use of marketing
levers, and the image companies have been able to build on the different
markets.
For example, in certain cultural settings (like Japan), the actions of
foreign managers, aimed at “internalizing” local behaviour through an
assimilation process addressing the host countries, produce a sort of
homogenization of needs and acceptance of new products by local
consumers. The “foreign” operator’s adjustment to the local market’s
culture in order to become an internal operator also lays the groundwork
for marketing, on site, other company products as well, differing from
those used for initial penetration; it is also an effective deterrent against
threats from potential competitors.
These issues have been the subject of debate in the economic and
corporate literature and, already in the early 1990s, some scholars’
(Vaccà 1990) interpretation of the globalization processes of markets and
competition supposed: that a company’s transnational development
could be configured only as a function of the local systems of reference;
and that globality should be understood as the “triumph of diversity” in
a framework of economic interdependence, rather than as
undifferentiated homogeneity of social organizations and behaviour in
production and consumption.
Despite the conclusions reached by some pioneering empirical
verifications (Laurent 1983; Adler and Jelinek 1986), which confirmed
the success of the international transferability of products, behaviour, and
managerial practices only where there was cultural compatibility of
nations and companies, the myth of “pure” global strategy pervaded
much of the economic and corporate literature of the 1990s, and, for
numerous large companies, was the strategic objective to be pursued.
In more recent years, the results of empirical research on the issue
(among others, Aaker and Joachimsthaler 1999; Rugman and Hodgetts
2001) show that successful companies capable of maintaining or
improving their competitive position have been able to revisit their
corporate policies, transitioning from modes of implementation typical
 Outsourcing and Reshoring
of global strategy into a “holistic vision” aimed at forging synergies in
the specific settings where the companies operate.
According to this view, it appears clear that, in searching for local
interactions, decision-making bodies have to be able to analyse the
specific features of the settings and to create appropriate mechanisms for
assimilating differences that, in keeping with local behaviours and
regulations, are capable of rooting the peripheral units deeper into their
specific settings (country, or homogenous group of countries or of
territorial areas). This is because many environmental factors considered
constant on the domestic market can become variable, and non-
knowledge can place companies before cultural, social, and economic
differences that are so distant that the decision-making policies
implemented within habitual confines can become inapplicable; the very
modes of acquiring tangible and intangible resources can also change
significantly.
However, to internalize specific local conditions, it is necessary to
develop a capacity to acquire knowledge on the host countries’ traditions,
behaviour, and customs. Therefore, for foreign companies to adjust to
internal operators, new entrants have to implement commercial policies
that gain traction on the outlet markets or are able, when the market or
the type of good so requires, to adjust the companies to the “internal
operators.”
A new way for the international company wishing to operate in a
perspective of globalization to compete is thus created, one less and less
dependent on the interaction processes put in place with the country’s
environmental setting, and more prone to seizing forms of
homogenization and symbiosis, with the logic and behaviour typical of
the settings in which it seeks to acquire competitive advantages.
At most, for some scholars, lower dependence on the country of
origin transforms the company pursuing global strategies into a stateless
corporation with no ties to the home country or to local communities—
an abstract entity marked by a management with its own specific culture;
except for certain large industrial groups with a high information
intensity and for certain large financial and services groups, scholars in
23
most cases agree as to the risks an entity like this can run, such as the risk
of losing credibility both on the domestic market and in the host
countries.
However, the choice of competing in a perspective of multipoint
differentiation can create pockets of inefficiency that, over the long term,
may compromise the company’s value creation: the numerous cases of
failure present in the literature have led large companies to privilege
development strategies in markets culturally close to domestic ones, in
such a way as to achieve greater synergies.
It seems clear that to strike a sort of compromise between
standardization and adaptation, the manager must, in a dynamic
perspective, move between two kinds of risks: the risks, inherent to an
abstract universalism, of rendering business activities ineffective, and
those, inherent to point- by- point adaptation to local situations, of
creating inefficiency.
Moreover, what the text in earlier pages has pointed out in terms of
the advantages gained by undertaking internationalization strategies in
clusters of countries or homogenous areas would appear to confirm the
thinking of those scholars who, in debunking all the myths present in the
global approaches, encourage company managers to “think regionally,
act locally, and forget everything that is global.”
The information is also true for the pursuit of the second objective of
global strategy—centralized coordination along the nodes of the supply
chain. Implementation problems arise in connection with the choice of
the most rational spatial deployment of the activities in the value chain,
for the search for the resources to be coordinated and transferred through
the multinational network, especially if the comparative location-specific
advantage is based on the exploitation of lower-cost factors.
Economies of cost, which should be at the basis of the location
advantage, may in fact fade if an inattentive examination of the specific
local environmental conditions leads, a posteriori, to more difficult
relations with local players, to costly monitoring of productions in order
to maintain quality standards, and to more complicated and burdensome
activities of coordination among the activities along the nodes in the
24 A. Calvelli and C. Cannavale
supply chain—from obtaining raw materials to transferring output to
distribution centres; not least, there is also the danger of creating local
competitors, especially if productive technologies can be easily
appropriated.
In the perspective that has been outlined and in the current economy
of the markets, a global strategy must therefore focus on seeking the right
trade-off between the economic integration of the activities performed in
the different settings, in terms of horizontal homogenization and vertical
coordination of dispersed activities, and adaptation to specific local
conditions.
Today, the search for the right trade-off can more easily be optimized
thanks also to the specific nature of the new technologies based on
information science. By permitting more consistent flows of
communication and higher levels of flexibility in productive,
organizational, and management processes, these new technologies also
allow companies to adapt to the variety and variability of the specific
settings, while spending less in terms of energy and resources.
The Risks of a Systemic Disconnection
In coping with the process of geographic decentralization of the activities
in the value chain, every multinational necessarily comes into contact
with different environments, each of which may require different modes
of interaction—modes that take on different characteristics and intensity
depending on the nature of the relationships the company establishes
with the players to which the activities are decentralized.
First of all, in intra-organizational networks, problems arise of
decentralizing decision-making power to peripheral managers. By
necessity, this power becomes greater with the broadening of the sphere
of relationships that the decentralized unit may implement with players
in its environment, due both to the country’s larger size, and to the greater
possibilities for peripheral managers to seize local opportunities.
A conscious conviction of central managers as to the need to delegate
authority to peripheral managers, to set aside rigid control systems, and
to create suitable coordination mechanisms must come into play; these
mechanisms are necessary in order for context-specific knowledge to be
translated into a language shared by all the network’s units and by the
centre, however distant it may be.
In this way, the configuration typical of the weakly connected system
(Orton and Weick 1990) is achieved: the connection among the elements
is provided by the fact that they are connected to one another while at the
same time maintaining a dose of determinacy. This connection, then, is
weak if the elements are subject to spontaneous changes and also
conserve a certain degree of independence and indeterminacy. This is
then a system that is open and closed at the same time, both indeterminate
and rational, spontaneous, and deliberate.
The information refers to an interpretation of the systems’ dialectics,
by which—according to the same authors—the following systems are
seen:
– Weakly connected systems, those where the reactivity and
distinctness of the individual parts coexist
– Closely connected systems lacking distinctness
– Unconnected systems, with no reactivity or distinctness
– Disconnected systems, where there is distinctness, but no reactivity
Starting from Orton and Weick’s arguments, to examine systemic
situations in a perspective of configurations companies can take on,
distinctness and reactivities have been interpreted with a corporate
interpretation key (Fig. 2.2):
– The distinctness of the systemic components may be likened to the
existence, in the system’s individual units, of a more or less high
level of decision-making autonomy;
– Reactivity may be seen as a level of interdependence of the
relationships binding the systemic components, a vision of acting of
the individual units aimed at achieving a common strategic goal; it
therefore supposes a coordination activity exercised by central
 Outsourcing and Reshoring 25
managers over peripheral managers, aimed at creating a spillover of more adaptive and creative locally; more stressful yet more motivating
knowledge of best practices, successful actions, routines, and for individuals; variable in fragmented contexts and consciously
corporate policies. undetermined where connected systems would be paralysed.
Included in this perspective are the current international networks of
The positive effects of a weak connection among the parts of an companies that wish to achieve satisfactory levels of effectiveness and
internationalized company have repercussions on the system’s efficiency: they blend different organizational principles, local
effectiveness: more inert and resistant to conscious, planned, and responsibilities and coordination, hierarchical control and market
integrated change, yet incentives, and technical specialization and results orientation. The very
increase in the relationships that an international company’s local units
implement with the operators in their setting weakens the bonds of
connection existing among the parties in the organizational system
which, since it can no longer be characterized as a set of indistinguishable
Weakly connected and therefore non- autonomous parts that act reactively with a high dose
systems of determinism (closely connected system), aims towards alternative
configurations increasingly characterized by a greater degree of
independence and higher levels of indeterminacy (weakly connected
systems).
Clearly, for the organizational system not to become wholly
disconnected, it is necessary to seek, precisely through coordination
Non-connected mechanisms, to halt decentralized units’ excessive thrust towards
systems independence, and to create more interaction between the parties. This is
the case, for example, of the multinationals that manage units abroad
with the logic of a portfolio of financial assets; from a national
Non-
perspective, it is also the case of a state enterprise operating through local
connected systems entities to which it leaves broad autonomy, without performing activities
to monitor and coordinate initiatives undertaken autonomously.
Lack of autonomy Presence of autonomy
Absent an effective coordination action, an organizational system
Delegation of autonomous decision-making to might take on the configuration of a set of loose cannons that, over the
subsidiaries long term, can only compromise the very survival of the corporate
organization.
Fig. 2.2 Systemic configurations of the organizations. Source: Our Conversely, the presence of weak relationships among a system’s
elaboration units is not on its own a restraint on the spread of innovative ideas in the
company; to the contrary, weak relationships, which leave more room
for creativity and the capacity of thought of individuals, may represent a
26 A. Calvelli and C. Cannavale
sort of “channel” through which innovations and new ideas may spread
among members of an organization or among groups of members; on the
other hand, strong bonds hopefully exist between the members of each
individual group, so they themselves might become bearers of innovative
decisions in the company.
While the given information has underscored the difficulties inherent
in the processes of coordinating the activities of multinational
organizations in which the presence of the “Corporate” should at least
theoretically guarantee, through its leadership, the system’s greater
stability, the situation becomes even more critical in the presence of a
network of international alliances created to exploit the different
partners’ distinctive skills through synergies and reliance on
complementariness.
The specific cultures of the environmental settings in which the
partners operate already give rise to an initial obstacle to change due to
the search for a homogenization of managerial behaviour, necessary for
achieving the agreement’s objectives and synergistic competitive
advantages. For networks of strategic alliances between companies—in
which each partner operates in accordance with autonomous logic and
behaviour and everyone aims towards a common goal—to be successful,
interpersonal relationships must be close, and founded upon trust. In
other words, the different business units composing the network of
alliances must interact in accordance with a team logic.
Alliances that do not see a parallel development, within the network,
of cultural homogenizations, and that are then configured as
disconnected systems, lead to commensalism or parasitism, which is to
say the impossibility of achieving the alliance’s own goals.
Management’s coordination activity is therefore a necessary
prerequisite for preventing the total disconnection of the intra-
organizational system, which is to say the components’ lack of reactivity
in the face of changes in the internal and external environment. On the
other hand, the presence of greater and closer relationships between
central and peripheral managers brings greater or lesser cognitive
advantages which, depending on the interested parties’ operative and
managerial resources, can be translated into the development of
relational learning processes.
Interaction by creating constructive dialogue among actors with
different cultures and behaviour can allow the central bodies to better
assess the exact dynamics of the local situations and to improve the
procedures regulating the dynamics of the knowledge accumulation
processes.
Through coordination, the groundwork is also laid to develop
learning by imitation, when the transmission of information and
knowledge among affiliates, made possible by the coordination exercised
by central managers, creates emulation and adaptation. Thus, for the
entire relational structure, a spiralling learning process is carried out; its
central element is the creation of new knowledge.
Therefore, the choice of the placement of affiliates and of the
managers to be assigned to them, the level of delegation of authority, and
the identification of coordination mechanisms, become strategic levers
that the geographically disperse large company can and must use to
acquire competitive advantages; identifying the levels of delegation and
the coordination mechanisms to be used requires, a priori, knowledge of
the specific nature of the environments where the business activities are
located.
Yet, empirical verifications have shown that when decentralization
processes are implemented in unfamiliar environments, the
costs/benefits analyses connected with a given choice assess first of all—
and often only—information pertaining to the economic and regulatory
situation of the localization area. It is rarely considered that the
environmental setting where the company is to operate results from the
interaction of multiple and complex variables, including the
organizations’ culture, and deeply rooted values can play a decisive role
in accelerating or countering affiliates’ operations.
In this regard, precisely the failure of the first entry operations into
the countries of Eastern Europe led certain multinationals to seek
possible modes of implementation of strategies able to create a closer
interaction with specific local environmental conditions. This research
 Outsourcing and Reshoring
highlighted the role played by Austria which, due to historical/cultural
affinities, serves as a node coordinating the policies for entering central
and Eastern European countries: multinationals coordinate the activities
located in the Eastern countries through their Austrian affiliates.
Coordination problems become even more complex when
decentralization choices lead to the creation of transactional relationships
with independent companies (outsourcing activities to international third
parties). Large companies outsource activities not confined to more
traditional ones of the tertiary sector (transport, distribution) or related to
processing phases generally with mature technology, but activities that
extend to complete business processes, to the entire supply chain, and, in
high-tech companies, to research and development as well.
With the increasing financial and currency difficulties faced by many
countries—not only in underdeveloped or recently industrialized areas—
and with developing political and ethnic conflicts, the hurdles to the
efficient maintenance of negotiations among companies, made even
more difficult by the existence of possible cultural and behavioural
asymmetries between the countries of origin and destination, grow as
well.
In decentralizing activities to difficult areas, the increased costs
connected with monitoring needs and infrastructural shortcomings may
in fact work against achieving the economies underlying the
decentralization choices. An a priori analysis of the dominant culture in
the various settings can help make the choice of the localization area
more satisfying, and may also contribute towards finding solutions more
suitable for overcoming the conflicts that can be generated in inter-
organizational relationships.
As to the decentralization of activities to partners in collaboration
agreements, the scope of cultural differences may fully emerge during
the implementation of international alliances, when cross-pollination
between different cultures can create a sort of culture shock—one that
grows greater the more distant the actors’ cultures are, and is often
accompanied by negative impacts on organizational involvement, on the
partners’ working environment, and on their respective performance. An
27
initial convergence of interests is not in and of itself sufficient to guaran-
ternational Strategy
tee the agreement’s success, since the key variable in forming and
maintaining a joint venture lies essentially in seeking a balance between
the cultural incompatibilities of the companies confronting one another.
The time to assimilate diversities and the hurdles to be overcome for
an effective collaboration between companies in different settings
increase the more dissimilar the partners’ cultural variables are, and the
more asymmetrical reciprocal knowledge is in the agreements’ start-up
phase.
4. Market Entry Strategy
Introduction
Several authors have dealt with the problem of
understanding what factors are most important in evaluating
a market. Industrial economists place more emphasis on
external factors, recalled in Hymer’s theories, in
internalization theory, and in institutionalist theory. In
Dunning’s approach as well, exogenous factors play a key
role in choosing the market to invest in if one considers that
that the advantages of location are, along with ownership
advantages and the benefits of internalization, the essential
condition for profitable FDI. Scholars closer to the strategic
perspective, influenced by the resource-based approach,
instead place greater emphasis on internal factors that, in the
Uppsala school’s evolutionary approach, become essential
to evaluating and increasing the involvement of firms on
foreign markets. The contemporary perspective based on
strategic management constructs, and therefore the need to
combine internal analysis and external analysis and the
necessary consistency between these and the market-
objective features, does not reduce the importance of
exogenous factors in urging internationalization—factors
that seem to affect not so much the choice of whether or not
to invest in a given
28 A. Calvelli and C. Cannavale
As is often the case, reality is more complex than theory, and
companies, in choosing to internationalize, are guided by a mix of
motivations arising from the desire to best exploit internal and external
factors. Internal motivations include many of the determinants identified
in the framework of the previous chapters: the desire to acquire global
leadership rather than to protect particular resources, or to exploit
particular cognitive resources originating from the cumulative wealth of
the enterprises which—by identifying new business opportunities rather
than the ability to consolidate their image or reach a global dimension
through FDI in a particular marketplace—decide to expand their
boundaries. Internal factors therefore reflect the presence of exogenous
factors that represent unmatched opportunities for the enterprise (supply
voids, access to knowledge or technology resources, reduction of entropy
risk, possibility of increasing the efficiency of some value chain
activities) in a virtuous circle that sees the interaction between interior
and exterior as the element that best represents the reality the enterprise
is dealing with.
Internal motivation/external factors also affect the choice of entry
mode. While companies often pursue composite goals that
simultaneously operate in different ways in different markets, it is
possible, seen from the perspective of simplification, to sketch some of
the main motivations that drive businesses to move towards a trade that
is more international than productive (Saviolo 2008). Compared to the
first option, the main reasons lie in the following: the desire to increase
sales volumes; the ability to reach a global dimension out of a desire to
diversify market risk; the ability to increase profit margins by selling at
higher prices; the need to discard stocks of finished products; and the
ability to act as first mover on a new market. Compared to the possibility
of adopting a pre-emptive strategy, the benefits generally accorded to
the first entrant are greater opportunities to raise the loyalty of local
clients, the ability to access scarce resources, the ability to leverage
resources for higher returns, and the ability to create stable relationships
that increase switching costs for local partners.
However, being the first mover exposes the enterprise to a number of
disadvantages that need to be carefully evaluated. They are high market
exploration costs, bearing costs for problem solving (dealing with
foreign.
Market Entry Strategy
market analysis and finding the most appropriate solutions), and
uncertainty regarding the intensity and conditions of demand (which may
delay the timing of the investment). In general, however, empirical
evidence shows that, when well designed, the pre-emptive strategy offers
businesses a better chance for survival.
The second option, however, is generally linked to the following
determinants: the ability to take advantage of work-related benefits,
access to particular productive resources, proximity to outlet markets,
and access to different cognitive and technological resources. Synthesis,
and therefore motivation, can be linked to achieving higher levels of
efficiency or to the need for technological learning.
The Main Steps of International Expansion
The planning of an internationalization strategy is based on an analysis
process aimed at identifying target markets, assessing the opportunities
and threats that characterize them, and identifying the most appropriate
entry mode. It is a complex process that must combine the resources and
skills that the company has with the opportunities and threats that
characterize the target markets.
Reflecting the strategic management model, the planning process has
to proceed through stages, identifying opportunities and threats that
characterize the macro environment, and then defining the extent of the
forces of the competitive environment that would affect the enterprise’s
business on that market. The study of the external environment,
consistent with resource-based assumptions, goes hand in hand with
analysis of the resources and skills that the enterprise has or can acquire
to ensure success in the new reference market.
The analysis process is not always simple; on the contrary, the
sources that the company has available are often varied and unevenly
coherent, especially when the interest concerns emerging or difficult
markets. It is in this perspective that management market skills become
key: the ability to understand the value of acquired information and to
 Outsourcing and Reshoring
understand what utility (applicability) it has in the specific enterprise is
a sine qua non for the strategy’s success.
Foreign market analysis cannot be considered a linear and
standardized process: psychological distance, the gap between the home
and host market’s development levels, language barriers, and the socio-
institutional context of the country of destination are all factors that
strongly affect the difficulty and intensity of the analysis. It is, however,
a fundamental moment in strategic planning even if the choice of
internationalization derives from the emergence of spot opportunities for
the enterprise. Those who do not acquire adequate knowledge of the
target market may not understand the threats they face or even the
barriers that can limit the attractiveness of these markets. In many cases,
non-planning firms rely on intermediaries who, by pursuing their own
goals, do not always serve the business’s interests. In even worse
situations, companies that do not learn often make the mistake of
channelling their products, with negative impact on their brand
placement.
This is the experience gained in Germany by many Italian pasta
companies that entrusted their products to large local buyers, available
mainly online, and also at low prices given the strong economies gained
by purchasing the products from the producer; these companies sold
pasta in medium-low market segments, in fact undermining the craft
production of small Campanian pasta makers, or even the functional
value of those making “special” pasta (lower sugar content, organic,
etc.).
Some Evidence in the Italian Pasta Industry
In 2011, a major German chef wanted to find a quality
Campanian pasta to be promoted in Germany and sold through a
distribution network of specialty products. Having come to Italy
often, the chef was acquainted with some well-known brands in
the Gragnano area, which, however, being already established in
the distribution channels and therefore known to the German
public, would hardly be accepted by consumers as specialty
products.
29
Research then focused on small craft pasta makers, products
distributed in Italy through special channels and still not mass-
produced. This research led to the identification of some valuable
brands from Torre Annunziata and Gragnano; nevertheless, not
even in these cases did the deal prove feasible. The problem, in
all three cases, concerned neither the product’s high and certified
quality, nor the quantity or condition of Market Entry Strategy
the supplies, for which the German distributor was rather
flexible. The Campanian enterprises, in theory, ticked every box
for success on the German market, but a problem, neither
insuperable nor unexpected by pasta enterprises, did not allow
negotiations to be concluded: firms that in the past had entrusted
the selling of their products in Europe to buyers or trading
companies realized that their brand was, in the online food
portals quite widespread in Germany, lumped together with
significantly lower-quality pasta, in many cases destined
exclusively for export, and also of non-Italian origin. Association
with these brands and the spread of online products made it
impossible to quickly reposition the products.
Businesses also proposed launching a brand new for the
German market, but lack of planning and inability to control the
market worried potential German partners, which decided not to
conclude the deal. Source: Our desk analysis
The literature agrees on the main moments in the strategic analysis
process, which essentially concern the following (Hill 1994; Hodgetts et
al. 1994):
1. Identification of target countries. This is an exploratory phase in
which the company verifies the presence of a potential market for its
products abroad. Through exploring opportunities and risks in
potential markets, the company identifies its potential reference
market. It is a phase of analysis focused on the external environment
30 A. Calvelli and C. Cannavale
and intended to check the presence of barriers or risks that could
reduce potential cross-border opportunities.
2. Once the set of potential target countries has been defined, the firm
will have to decide on the specific area in which to implement its
strategy. This requires the company to carefully assess the potential
and specific risks of the individual markets and the degree of
attractiveness of its business. Macroeconomic analysis will
therefore aim at assessing the impact that individual macro-energy
forces have on business activities and will be complemented by
careful analysis of the competitive environment by identifying
competitors (direct, indirect, and potentials), the characteristics of
demand, and the contractual strength of suppliers. The company
considers economic, social, and geographic indicators, which look
for and evaluate the type of investment it intends to carry out in the
country (simple sale of products, realization of commercial FDI,
production relocation processes, etc.). Economic indicators (e.g.
GDP, per capita GDP, unemployment rate, and inflation) yield
information on the country’s current economic phase, consumer
buying capacity, low labour costs, the role of the state, and the
presence of laws hindering or facilitating investment. Socio-
demographic data, on the other hand, elaborate a picture of potential
consumer/worker profiles in the country. Although this is only a
summary analysis, it can be of use for understanding the
stratification of the population, the presence of certain segments of
interest to the enterprise (consider products that require particular
levels of literacy or that are directed to particular age groups), the
level of qualification of labour, and so on. Significant information is
also obtained from geographic data: the country’s morphology, the
presence of transport networks, or, conversely, the lack of
infrastructure may make investments in some areas inefficient or, in
the case of an export, may require addressing local intermediaries as
still takes place today in several republics in the Commonwealth of
Independent States.
3. Having narrowed the set of target markets, and before starting the
entry process, the enterprise must be able to quantify or at least
estimate the major risks that characterize them. It is difficult, in fact,
to establish a chronological order between this phase and the
previous ones; Simply put, it may be asserted that while at the first
moment of analysis the available country risk data and investment
risk are considered useful data already narrowing the scope of
analysis; but once the potentially more attractive markets are
selected, the company will need to deepen the level of risk analysis
by identifying the impact that financial variables, as well as political
and social ones, may have on their specific business. An initial major
assessment concerns the country risk that may have important
repercussions on the profitability of the investment, the ability of
local debtors to honour their debts, and the company’s ability to
recover over time the investment that was made. Although risk
assessment is generally assigned to specialized institutions, it is
useful for management to understand the
Market
Entry
Strategy
factors underlying country risk, which is one of the basic elements
of the analyses carried out by consulting firms and institutions
interested in supporting internationalization processes of
enterprises. The intensity of country risk as a wider case of
counterparty risk is obviously amplified in those countries that do
not have regulatory and financial institutions able to protect foreign
creditors. Consider, for example, the possibility of a country being
exempted from the obligation to comply with contractual clauses, or
the hypothesis in which a contract contains clauses in breach of
current law that are therefore null and void for local law. Situations
of this kind create daily problems for businesses, especially small
ones, that export to international markets, and can only be reduced a
priori, through adequate analysis of the regulatory system and,
 Outsourcing and Reshoring
hence, through identification of clauses referring to the rules in force
or establishing the use of international arbitration (obviously in the
signatory countries of the conventions on the subject). Country risk
assessment comes on top of the assessment of financial risks
associated with internationalization. These risks, in the simplest
assessments, are related to exchange rate trends and to the possibility
that the presence of economies administered or the impossibility of
using some payment instruments will increase exposure to price
risks. In any event, the risk assessment does not generally aim at the
a priori exclusion of a given market. In order to reduce entropy risk,
companies do not aim to exclude some markets to the benefit of
others, but, in order to minimize the risks, seek the ways most
appropriate for the specific characteristics of individual markets.
4. After the process of analysing and defining the target market, the
company goes on to evaluate the most suitable entry mode into the
given market. In the first case, the firm will have to decide whether
to limit its presence on foreign markets to commercial activities or,
on the contrary, to adopt production relocation processes. It is at this
stage that the goals the company intends to pursue through
internationalization—as well as the resources available to the
process—take priority. The greater the involvement of upstream
activities, the higher the internationalization risk, and the greater the
focus on the choice of ways to ensure an adequate level of efficiency
without exposing the enterprise to the risk of losing control over
important sources of competitive advantage.
Having identified the most appropriate development path to meet the
company’s specific needs, the country will then have to evaluate the most
convenient and appropriate operational solution to achieve the intended
objectives. For example, in the case of internationalization, management
should assess the possibility of limiting itself to an export activity rather
than the design of a franchise network or the creation of a commercial
investment; in the latter case, it will have to decide whether to build a
new network, acquire a local competitor, or still opt for a strategic
31
partnership. Each solution has potential advantages and criticalities:
limited investments often have fewer opportunities to control the sources
of competitive advantage and even fewer learning opportunities, which
plausibly precludes transition to a more profitable presence on the
foreign market.
Generally, the choice between alternative entry modes is carried out
by evaluating the following points (Couturier and Sola 2010): potential
demand; consistency between demand (or sales conditions) and product;
investment of resources; and flexibility.
The presence and magnitude of potential demand does not only affect
the choice of whether or not to export to a given market; on the contrary,
it can be an essential element in choosing whether or not to make a
productive investment, given the possibility that the plant’s output is
more or less easily located on the foreign market.
The second element concerns the greater or lesser consistency
between the product offered and the characteristics of demand (culture,
institutional barriers, packaging, certifications). This factor directly
affects the choice of direct and indirect exports: if there are too many
barriers to the entry of products, especially for smaller companies, the
choice of turning to a local intermediary often becomes a compulsory
path to take. It may also impact the realization of a productive investment
and, more particularly, the choice between managing one’s own premises
and collaborating with local partners, who will more easily access the
information needed to overcome the barriers. Among other things, as has
happened to
Market
Entry
Strategy
Japanese automotive companies and, as is the case in many agri-food
sectors, the presence of tariff barriers frequently does not drive
companies to the creation of FDI rather than to international trade.
As far as resources are concerned, these are a central element of
choice. The term “usable resources” does not exclusively connote those
32 A. Calvelli and C. Cannavale
owned by the enterprise, but also those easily acquired—yet also easily
integrated into the enterprise. In general, limited resources—but also the
desire to reduce the risks resulting from the excessive involvement of
resources— drive companies to use collaborative rather than competitive
modes.
The willingness to employ resources also depends on the estimation
of the gap between desirable and achievable results, also in light of the
contractual strength of horizontal and vertical competitors (presence of
direct competitors, degree of supply concentration, distributor power,
distribution network quality, logistical difficulties, supplier bargaining
power, imbalance in the aggregate value chain, etc.). The example
outlined earlier in the text clearly clarifies the value of this gap and the
impact it may have on future business choices.
Flexibility of choice: as anticipated with regard to the
internationalization strategy, the strategic asset must be carefully
evaluated in order to avoid a subsequent rethinking of it, which would
expose the enterprise to high investment or re-conversion costs. Variety
and environmental variability require the enterprise to preserve
flexibility as much as possible, and this is even more the case in less
advanced markets where sudden political changes, economic and
financial shocks, and natural events can quickly change demand
conditions and affect the productivity of the supply. It is then necessary,
at the same level of control over the strategic importance of activities and
the management of key relationships with context stakeholders, for
companies to show preference for collaborative, more flexible modes,
over competitive modes.
Generally speaking, some empirical analyses have shown that, as a
rule, involvement in foreign markets grows along with intensity of
demand, the international experience of the enterprise, its size, and the
level of economic development of the target country, and that,
conversely, it decreases the cultural and political distance between the
country of origin and the country of destination (Reddy and Naik 2011).
Market Entry Strategy
of under 3%. Growth rate is the most obvious difference between the
various markets; food habits—although the specifics of the different
cultures present, in fact, some important homogeneities—are linked to
the tendency to eat out and have smaller families, as well as to the need
to consume quick and easy meals without renouncing food quality. From
the point of view of product adaptation, Italy and the United Kingdom,
which have a strong propensity towards quality and specialty foods, have
the greatest potential, given that within the company’s product range,
75% would require no adaptation.
The competition analysis highlights three main categories of players:
1. Food producers Unilever Bestfoods, Nestle, Masterfoods, Danone,
McCain Foods, Kraft Foods, HJ Heinz, Cadbury, and Barilla are all
considered the main industry players.
2. Other regional companies, for most specialized and limited
production product lines.
3. Distributors, and hence wholesalers, which offer a wide range of
products and services; Cash and Carry, which mainly supply small
restaurants and are threatened by large chains of organized
distribution; direct sellers and retailers.
As for direct customers, these are essentially represented by business
operators (hotels and restaurants) and institutional operators (school,
canteens, hospitals, personal and public administration facilities).
Although the structure of the three countries is similar, there is a
markedly different level of concentration of competition and contribution
by actors to value creation. The majority of this sector is run by a small
number of market leaders.
In the United Kingdom, the acquisition of a producer was considered
the most appropriate solution. The market’s high level of competition
required, in fact, choosing a method that would make it possible to enter
the market quickly. For the same reasons, greenfield investment was
discarded, while the possibility of a partnership with local distributors
was not considered optimal given the risk that, thanks to increased
 Outsourcing and Reshoring
knowledge and greater market control, the latter would develop
opportunistic attitudes that might eat into the German company’s
margins.
The acquisition target was found among 60 small- and medium-sized
local manufacturing companies. The criteria behind the choice were the
range of products offered, the features of the covered segments, the
market resources and logistics network, geographic coverage, and the
potential for cross-selling with the retail business.
Conversely, in Italy, analysis has led to the choice of a greenfield
investment, but gradual and planned, with a reduced sales force to
increase over time. The choice was justified by the lower intensity of
competition, the greater market fragmentation, and the lack of
distribution. In Italy, distributors and producers are still relatively small
and the market is growing, faster than in other European countries.
Poland had a complex situation: an estimated Compounded
Average Growth Rate (CAGR) of less than 3%, but high
potential linked to the plausible increase in per capita income. A
small number of multinational producers control 50–60% of the
market, and several medium-sized wholesalers are undergoing a
consolidation process. Finally, in contrast with the other two
countries, only 30% of the catalogue was likely to be sold
without alteration. The German company therefore opted for a
partnership with a well-established regional wholesaler on the
Polish market. This option was preferred for a better
understanding of Polish market potential over a relatively short
period of time and limited strategic risk. An acquisition would
have been too risky given the uncertainties of the market and the
institutional context. Source: Our desk analysis
Choice of Entry Mode
In implementing an international growth strategy, a company can choose
among different modes of strategic action by setting up competitive
relationships and collaborative relationships with other market players.
Competitive relationships are essentially the result of the
development within the company of all those activities aimed at
33
improving their position on current markets or new outlet markets.
Increasing resources and expanding knowledge can be achieved through:
• internal development, implemented through the company’s know-
how and knowledge deployment (acquisition of technology and
technology, recruitment of specialist managers and new staff);
• external development, achieved through the impacts of non-
possessed knowledge (technological, market and general
management); cases arise from the acquisition of companies that
possess complementary or synergistic knowledge, acquisition of
suppliers (vertical upstream integration), or business customers,
distributors, and downstream
Market
Entry
Strategy
manufacturers following the implementation cycle in the company
(vertical downstream integration);
• collaborative relations coming to fruition in cooperation agreements
(or strategic alliances) between companies that, while retaining their
decision-making autonomy, decide to cooperate in order to:
– exploit the cognitive asymmetries of the parties to the
agreement through the use of specific technological,
market or production complementary knowledge
(asymmetric or, as Porter claims, type X alliances);
– create synergy in the results (synergic alliances or Porter
type Y) through the joint operation of partners possessing
distinctive competencies
From this standpoint, it is clear that the formulation of a strategy for
the development and choice of ways to implement the pursuit of strategic
objectives leads not only to the delimitation of the competitive
environment in which the company will operate but also, from a systemic
point of view, to the creation of a new set of relationships that the
enterprise will have to establish with the interlocutors in its environment.
34 A. Calvelli and C. Cannavale
Therefore, the decision-making process requires defining the following
elements:
– Control over (or ownership of) the resources that the
enterprise will invest with new and old actors in its
environment in order to pursue the chosen strategy;
– Cooperative relations (strategic alliances) that the
company intends to establish with different partners
along the value chain corresponding to the strategic
choices made;
– Market relationships that place the business in relation to
input providers and customers for their output. It is in this
relationship that involves the contractual power the
company has managed to conquer in its market through
behaviour, strategic actions and managerial practices;
– The competition relationships that bring the enterprise
into conflict with its present and prospective competitors.
These can be both actual or potential competitors.
Entry choices show different degrees of complexity and can follow
two evolutionary paths of business-to-business (transversal) trading or
the transfer of productive and oriented resources and technologies, and
therefore the acquisition of inputs (non-trade); it should also be noted
that the final orientation of the actions taken by the companies, not
directly related to the action taken, is always to place their products and
services on the outlet markets as much as possible.
From the point of view of internationalization driven by the search
for more defensible competitive advantages, companies tend to place
their output outside domestic borders, both to increase their growth rate
and to gain more strength in their actual competitors and potentials. In
this sense, businesses both large and small tend, or should tend, to expand
outlets. By expanding the outlet market, the risk of a saturated market is
reduced for businesses in the same area, where it is virtually impossible
for them to maintain their growth rates.
Vertical integration, as is known, occurs when an enterprise acquires
control over an upstream or downstream activity either through internal
growth manoeuvres (implementation within know-how and knowledge)
or by means of external growth manoeuvres (acquisitions and mergers),
with the goal of massively smoothing the efficiency of manufacturing
processes and the effectiveness of economic outcomes. Within this
scheme, it is clear that integration is a phenomenon that can also cover
an internationalization dimension when involving companies operating
on different markets. In particular, the integration process offers
management the opportunity to diversify the sources of technological,
organizational, managerial, and market knowledge, because, as the
production/ distribution cycle expands, so does the company’s
knowledge of the technologies used for the production of raw materials
and semi-finished products, and of the market for its products.
The integration process can take place through mergers and
acquisitions, helping to rebuild businesses and to gain market positions
with the speed that simple internal development could not allow. They
guarantee the ability to realize all the potential benefits of a combination
of activities and capabilities, in ways not allowed by other forms of
partnership. In addition to the undisputed advantages offered by
acquisitions and mergers, it should not be forgotten that it creates, with
external integration, the level of organizational and managerial
complexity of companies
that are in charge of managing new competencies, that is, new
professionalism and non-family activities.
Even in an internally integrated way, the greater level of complexity
compared to exporting—found in downstream forms that, by requiring
the creation of special units finalized for the overseas marketing of the
company’s products, involve the activation of more expensive
coordination mechanisms and greater cognitive needs for access to outlet
markets and the success of the initiatives undertaken—is clear.
If new forms of international development have emerged from the
uncertainty of overseas operations—given the different types of strategic
alliances in our day—the growing spread of increasingly sophisticated
knowledge driven by the growth of relationships between transnational
 Outsourcing and Reshoring
actors has created a driving force for the growing complexity of the
external environment of enterprises.
The emergence of new modes of non-competitive foreign
involvement (alliances), on the other hand, “activate—and do not
squeeze—competitive confrontation” (Vaccà 1986) and the organization
of externalities, including collaborative strategic modes, poses for the
company, in a dynamic perspective, “problems of greater vulnerability
and uncertainty, and hence the greater need for organizations to adapt to
the environment in which they operate” (Calvelli 1989).
In deciding on the evolutionary paths to follow, choices between
modes of competitive development and collaborative modes require
management to strike a proper balance between the two alternatives, and
the ability to identify the most appropriate institutional structures, in
which both competition and cooperation should take place (Teece 1989).
The conclusion reached by Teece’s analysis places the emphasis on a
collaboration that may prove necessary to stimulate competition,
especially in fragmented sectors.
Competitive Entry Modes: Import/Export
For many firms, exporting is the simplest way to enter foreign markets,
and consists of selling beyond the company’s output boundaries. It is
generally a mode associated with other forms of presence on foreign
markets, but for small companies, it is often the only form of
internationalization they implement. Export to foreign jute markets
reduces entropy risk and positively affects brand awareness while
contributing positively to consolidating corporate image and customer
loyalty.
Exporting can take place directly, if the enterprise develops direct
contact with the foreign market, involving its own sales personnel or
resources that cooperate on a continuous basis with the enterprise, or
indirectly, by contacting specialized intermediaries that serve as an
interface between enterprise and foreign markets. The second choice,
albeit less costly, exposes the company to significant risks and reversion
costs that should be carefully evaluated before embarking on such a path.
Small businesses, which do not usually export or do not have a stable
flow of exports, generally show interest in operating on foreign markets
35
through indirect exports, leaving other organizations the initiative to sell
abroad, while continuing to focus on the home market which remains a
priority. Subjects involved as intermediaries that take over the initiative
to sell abroad may be of a different type, and the border between one type
of broker and the other is not always clear. An essential element in
differentiating the services offered, and therefore the appropriateness of
turning from one to the other, lies in the intermediary’s ability to
represent several competing products and to be specialized in product or
market. Generally, the following classification is proposed (Calvelli
1998):
– Large buyers operating in the target market or in the region to which
it belongs (buyer).
– Importers/distributors operating on a specific reference market.
– International trading companies (trading companies), generally
present in multiple markets, usually acquire a number of products
from one country’s businesses to resell them to several outlet
markets. In the most difficult markets they often establish relations
with other local intermediaries (distributors or buyers).
– Export consortia; in this case, they are consortia created by the same
companies that intend to export and are therefore more inclined to
act in the interests of the associated companies. In this case, the risk
of opportunism is lower. In addition to brokerage firms proper are
those that act as multi-firm agents and that specialize in promoting
products on foreign markets, starting relations with local distributors,
organizing participation in fairs, and procuring trade partners. The
main difference between this type of broker and the companies
mentioned earlier lies in the fact that the agent does not purchase the
products. It is therefore a hybrid form of intermediation that is
potentially riskier than the others: the risk of the surplus remains with
the enterprise that self-assimilates its learning process by relying on
specialized figures in initiating contacts with local distribution and,
hence, in the composition of its positioning on foreign markets.
Some Evidence in the Perfume Industry
36 A. Calvelli and C. Cannavale
The perfume industry is quite fragmented: besides large
producers with a very large portfolio of brands, there are
medium-sized operators specializing in particular product lines
and small operators that cut out successful niches by focusing on
particular essences, the organoleptic characteristics of their
products, strong references to the territory, or any other elements
of differentiation to offset lower brand awareness. In order to
gain visibility in retail distribution, the war between trademarks
is ruthless. The market is fragmented as well, and being present
in a number of outlets sufficient to reach an acceptable volume
of business is often expensive for businesses. The choice then
becomes that of relying on the support of specialized brokers,
trading companies and international distributors that usually
operate exclusively in the industry, representing different brands
and competitors. The attractiveness of these distributors lies in
the possibility, that the manufacturing companies have
perceived, of arriving quickly on the shelves of large perfume
shops, and thus becoming accessible to consumers. On the other
hand, the risk of being in competition with excessively more
wellknown brands and, therefore, of not achieving concrete
results, is definitely high.
An industry analysis has also highlighted that in this sector,
the risk of intermediaries’ opportunism is particularly high and
is manifested through the characteristic behaviours of the
industry players. Intermediaries have little interest in engaging in
the sale of a specific product (or brand) in the portfolio; on the
contrary, they have the luxury of promoting all the brands they
represent and targeting simple, fast sales on all markets, thus
enabling them to quickly post their turnover and planned
margins. It is often the case that the products of the individual
company are not adequately represented and that sales proceed
according to an inertial mechanism that seeks to increase the
sales of some particular products and to stop the sales of others.
Intermediaries often only promote the company X product that
is useful in completing their offer; in other cases, they promote
only some offline and other online products, simply following
the spot opportunities that are presented without any planning
activity that can raise the same company’s standing on foreign
markets.
The opportunistic policy of intermediaries and the lack of
information on foreign markets has a negative effect on
production planning and business inventory management. This
in turn brings negative effects on their profit margins, which, in
a negative spiral, see a decline over time in the resources to be
invested in foreign markets. Source: Our desk analysis
In all forms of indirect export, the risk that the enterprise might miss
development opportunities and that, above all, might be unable to
recover disadvantageous competitive placements due to the lack of
information on sales performance and customer satisfaction is very high.
Indirect exports, on the one hand, reduce the risks and costs incurred by
the internationalization firm; on the other hand, the intermediary, in fact,
carries the knowledge of the local market, which takes on the costs and
risks of the operation. In fact, there is a lack of direct contact with
customers by the exporting company, and a lack of information on
market trends. In addition, as commodity standardization increases,
intermediaries tend to generate price competition between the various
producers, by threatening the possibility of turning to other suppliers.
In addition, underlying the buyer–buyer relationship is a potential
conflict of interest, since the intermediary often tends to act
opportunistically by maximizing short-term profits, while the firm, in its
approach to foreign markets, should maintain a more stable medium or
long-term perspective.
A more strategic approach to foreign market sales is that of direct
export, generally used by large companies, although some encouraging
signs are now evident among Italian SMEs. The largest exporting
company generally connects directly with the foreign distribution system
through its own sales force, a stable foreign structure, or single-firm
agents. In this case, the enterprise initiates a learning process that
expands the chances of success, enabling the company to identify new
business opportunities or simply to consolidate existing ones. The risk,
 Outsourcing and Reshoring
on the other hand, lies in the possibility of making the company structure
excessively rigid, through the immobilization of capital on foreign
markets.
Choosing the mode of export—direct or indirect—most suitable for
the enterprise depends on a combination of various elements. According
to a recurring classification in the literature on the subject, the
complexity of the factors influencing the different forms of entry onto
the foreign markets may be divided between those inside and those
outside the target market. The most important factors are connected to
the following:
– The temporal horizon of the choice: If the market entry corresponds
to a spot opportunity and concerns the disposal of finished product
stocks, it is plausible that the enterprise might opt for indirect exports
so that it does not bear the costs and risks associated with a medium-
to long-term investment
– The strategic objectives set (growth rates, market shares,
profitability): If the goals are considerable and reasonably
achievable, the firm will opt for direct exporting, also to prevent the
mediator’s mistakes from causing damage to image or making it
difficult to revise the deal with distribution at a later time;
– The type of product sold, such as specialty products or instrumental
goods that generally require a direct export through the creation of
their own units abroad;
– The resources available and the knowledge that is part of the
cumulative assets of the enterprise: If the company has no knowledge
of the landmarks, direct export is risky; on the other hand, the
company might agree to postpone the choice of entry and save the
time needed to deepen the knowledge of the target market and
identify people capable of representing it successfully;
– The strategic positioning of the product that the company intends to
achieve: If the positioning responds to a choice of differentiation,
direct market control is necessary to avoid image damage or
mismanagement of after-sales services;
37
– Identifying opportunities and threats in the external environment
where the company intends to operate: An example of a threat may
be represented by an overly fragmented distribution system,
logistical difficulties or even non-tariff barriers, all of which require
the intervention of locals or those at any rate well-placed in the local
socio-economic fabric.
Today, most companies acquire goods and components from firms
located in different countries. Globalization offers the opportunity to
exploit the location advantages for all the activities in the value chain,
and importing concerns the search for inputs on foreign markets.
Increasing competition requires preserving efficiency, but depending on
their strategy, firms are often compelled to look to high quality inputs,
and this requires the establishment of good relationships with foreign
suppliers. In some cases, firms involve intermediaries in the international
purchasing process, but more and more they are learning the advantages
of direct relationships. Above all, when imports come from distant
countries, characterized by different productive systems and different
business cultures, interpersonal relationships are crucial to guarantee the
quality of inputs and components. This is particularly true when the logic
of international purchasing is not exclusively connected to efficiency, as,
for example, in the case of Label Rose.
When efficiency is the final aim of international purchasing, the
situation changes dramatically, and firms do not establish direct
relationships with their suppliers. In order to reduce costs and focus on
more valuable activities, such as R&D and marketing, firms tend to
outsource their operations. Quite often, firms find they care more about
costs than about the reliability of the final suppliers, which, above all in
East Asia, are often different from the outsourcer: companies make
agreements with major components suppliers, and the suppliers
outsource this activity again to producers located in cheap markets,
without providing any guarantee on labour conditions or organizational
processes. This is very dangerous because, as the latest scandals show,
companies can have very bad image returns.
Some Empirical Evidence from the Columns
38 A. Calvelli and C. Cannavale
A world-well-known German producer of candies came under
fire in 2017 for a scandal connected to its Brazilian suppliers.
The German company purchased carnauba wax from a Brazilian
company that produced the ingredient under slave labour, and
was also accused of sourcing its gelatin from producers that
maintained cruel conditions for animals.
The news spread the world over, producing a very strong
negative effect on the brand image. Although the company
immediately tried to limit the effects of the news, promising
strong controls on the supply chain and declaring the
impossibility of accepting such conditions, boycotting began,
forcing the company to make considerable investment in
marketing and social initiatives to reposition its brand. Source:
Our desk analysis
The Integration Processes: Foreign Direct Investment
From a historical standpoint, international business development
(especially in the United States) was a sequential phase in large firms’
evolutionary expansion process. Corporations began to concentrate
monetary and knowledge resources in their core business and within the
boundaries of the domestic market, and only after having achieved a
sustainable and lasting advantage in the home business did they begin
vertical integration as a third-step diversification strategy.
‘Vertical integration, as is known, occurs when an enterprise acquires
control of an upstream or downstream activity, with the aim of
maximizing the efficiency of manufacturing processes and the
effectiveness of economic results. Within this scheme, it is clear that
integration is a phenomenon that can also cover an internationalization
dimension when involving companies operating on different markets. In
particular, the integration process offers management the opportunity to
diversify the sources of technological, organizational, managerial, and
market knowledge, since, as the production/distribution cycle is
extended, the company’s knowledge of the technologies used for the
production of raw materials increases, as does market knowledge for the
marketing of materials and products on the target markets.
In economic theory, internationalization by integration finds
significant placement within the approaches to transaction costs. Indeed,
this phenomenon was originally created by the businesses’ objective to
control access to raw materials and to minimize their costs, or to more
directly control the outlet markets. However, these objectives were not
always optimizable through market mechanisms because of the high
risks associated with the stipulation and successful outcome of the supply
contracts put in place by contractors, or linked to changes in consumer
tastes and their lifestyles. In addition, market mechanisms did not allow
an effective transfer of knowledge and of scientific and technological
know-how, with the effect of stimulating the convenience of
internalizing the upstream and downstream production phases in order to
achieve greater efficiency and, from this, a more effective
entrepreneurial activity.
With regard to the phenomenon of MNCs, the scientific literature has
developed numerous interpretative models. In fact, while trying to
identify the determinants of foreign direct investment, scholars have not
always captured the centrality of firms’ strategic choices and core
competencies. The debate took place around
• a model of foreign direct investment (FDI) based on internalization
theory; and
• the model of international development of the large enterprise,
whose theoretical foundations reside in the theory of market power
(Hymer 1976).
In particular, within the explanatory models of the international
development of large enterprises, the underlying idea is that, at the initial
stages of growth, firms seek to constantly increase their internal market
share, through functions and expansion of production capacity, in the
hypothesis that increased market power (concentration) increases profits
(Cantwell 1989). For this reason, Chandler (1962) stresses the market’s
dominant and driving role. The author argues that, at a precise historical
moment, the phenomenon of firms’ growth stemmed from the ability to
exploit, through a more efficient use of resources, the opportunities
 Outsourcing and Reshoring
offered by the expanding market thanks to demographic growth on the
demand side, and technological progress on the production side.
At present, with increased business management capability and the
development of globalization, understood as the interdependence of
markets and the ubiquity of competitive advantage, companies have been
able to strategically and internationally plan the most suitable
organizational configuration for the exploitation of different comparative
advantages, as well as the generation of exclusive competitive
advantages.
Global-minded business can consider all foreign markets as a single
large market, and distribute their value-chain activities on the basis of
the comparative advantages of countries, and the opportunities in the host
countries, considered of course along with the coordination costs of
offshored activities.
In modern businesses, the phenomenon of international development,
through upstream and downstream integration processes, has gained
more importance. From the point of view of learning, it represents the
way in which the enterprise realizes its presence on the learning market,
thereby opening cognitive windows in environments with a higher
intensity of knowledge.
Acquisitions and mergers, the two ways in which the supplementary
process can take place, have a remarkable ability to contribute to the
renewal of businesses, helping them gain market positions with a speed
that simple internal development would not allow. They guarantee the
ability to realize all the potential benefits of a combination of activities
and capabilities, in ways not allowed by other forms of partnership.
Some Examples of International Acquisition
Miss Sixty, founded in 1987 by Wicky Hassan and Renato Rossi,
has very well-known brands, such as Miss Sixty, Energie, Killah,
Murphy&Nye, and RefrigiWear. After the crises beginning in
2009, the group lost revenues, becoming an easy target for Crescent
HydePark, which has aimed to exploit Miss Sixty’s resources and
managerial competencies to relaunch the company on the
international market.
39
Our elaboration from Il Messaggero, 22 May 2012
De Tomaso, an Italian producer of well-known sports cars, was
acquired by the Chinese Ideal Team Venture, a carmaker, in 2015.
De Tomaso’s technical specialties were the main reasons for this
international acquisition Kong. Our elaboration from La Gazzetta
dello Sport, 28 April 2015.
Alongside the undoubted benefits of external growth manoeuvres
(which is what acquisitions are), we need to consider the potential
problems connected with growth. Acquisitions increase organizational–
managerial complexity, because they allow entry to new skills and new
professional figures, in addition to the challenge of managing unfamiliar
activities. For example, in the forms of downstream integration, the
acquisition of special units intended for overseas marketing involves
activating more onerous coordination mechanisms, and greater cognitive
needs for access to outlet markets and for the success of the initiatives
undertaken. In addition, managers face the difficulties of creating the
necessary osmosis with new entrants in order to establish a unity of
purpose within the overall corporate environment—that is to say, in order
to find a point of sharing between beliefs and values that may, when the
players come from dissimilar cultures, diverge and hence create the
conditions for the initiative to fail.
FDIs were seen as the main entry choices for MNCs. The efficiency
theories explained in the first chapter show, in fact, given the advantages
related to making investment in foreign markets (advantages, however,
that bring increasing environmental turbulence and the hyper-
competition linked to globalization), FDIs today pose a number of risks
that often push businesses to opt for more flexible modes of entry. The
majority of FDIs are also referred to as a non-trading entry choice
connected to the opportunity to offshore production and upstream
activities in order to save costs, but also to the aim of acquiring a global
dimension in oligopolistic markets.
The rationale behind the creation of FDIs is the same referred to for
integration: the company grows in size in order to be present on the
learning market, so as to reach a global dimension or preserve its
competitive position by eliminating competitors from the market.
40 A. Calvelli and C. Cannavale
Acquisition is the driving force behind the dimensional development
processes of automotive companies; it is a strategy different from that of
the Italian- made textiles/ clothing industry, where the acquisition of
competing firms and brands often responds to the logic of eliminating
competitors from the market. In the scheme proposed at the beginning of
the chapter, the creation of Wholly Owned Subsidiaries (WOSs) is
considered as a different form of integration. The FDI can consist of a
greenfield or a brownfield investment, but the point is they maintain
strong control over the offshored activity.
Apart from the creation of its own business, FDI can also be achieved
through the acquisition of pre-existing shares of companies. In the first
case, the transaction is riskier: in the case of capital outlay, the risk is that
the investment is not profitable due to lack of demand, inability to hire
adequate human resources, delays in building the facility, technical
problems related to the structure or to the production system, possible
delays in obtaining approvals, licences, and certifications. Investment
times grow longer and expose the company to additional risks associated
with bureaucracy and the country’s regulatory and institutional system
(Dikova and Van Witteloostuijn 2007).
Within FDI, participation in the ongoing privatization processes in
emerging countries offers interesting opportunities (Cannavale 2008).
Several authors have in fact stressed the potential benefits of foreign
investors’ participation in the privatization processes of large state-
owned enterprises (SOEs) and the opportunities arising from the
exploitation of the tangible and intangible resources these SOEs possess,
as well as the ability to develop, through collaboration with state
managers, greater knowledge of the local market, and to overcome the
difficulties of lack of information through the relationships investors
have with other local operators (Czinkota et al. 2002; Rondinelli and
Black 2000; Spicer 2000). New businesses also have the first human
resources employed in large SOEs—specialized technicians accustomed
to far lower remuneration than those expected for employees with
equivalent qualifications in advanced countries (Djarova 1999);
international companies therefore have the possibility of offshoring
knowledge-intensive activities as well as mature technologies, of
exploiting the cost-effective benefits of attacking new demands, and of
improving their position competitive in advanced markets (Rondinelli
and Black 2000; Kedia and Julian 1995).
Collaboration with SOEs and participation in ongoing privatization
processes can also be a necessity: in some emerging countries; it still
represents the only opportunity to penetrate local markets, because of the
extra taxes and bureaucratic difficulties imposed upon wholly owned
foreign enterprises (WOFEs). In these same countries, however,
investors should value the lack of managerial and marketing knowledge,
given the strong protections SOEs had before the start of transition
(Czinkota et al. 2002).
Privatization plans and attitudes of local institutions change,
however, from country to country. In order for the foreign investor to
succeed, the involvement of the foreign enterprise must be perceived by
the internal players as a win–win process, that is, as a profitable
agreement for all the stakeholders involved foreign affairs, local
government, and privatized enterprises. However, the risks associated
with such operations must not be neglected: in many countries, there are
still strong adversaries to the entry of foreign operators, especially in
areas considered strategic for the country’s economic development;
public opinion, also weary of the sacrifices connected to the economic
downturn of the early years of the transition, is in some cases opposed to
complete privatization, and this impels local governments to preserve the
social content of certain activities (Czinkota et al. 2002; Rondinelli and
Black 2000). In these areas, government policies are geared to
maintaining strong control over entrepreneurial activities, strong
investment is required for the participation of foreign entrepreneurs, and
the risk of nationalization is greater.
Cooperative Modes
Cooperative modes of internationalization are largely employed today to
preserve flexibility and specialization, understood as strategic levers for
firms’ competitive advantages. They are no more specific than small
firms, and MNCs use more and more joint ventures and strategic
alliances in all situations where the risks associated with FDI would be
too high. Successful cooperation requires managers to be oriented
 Outsourcing and Reshoring
towards learning from their partner and towards sharing their knowledge;
they must adapt their competences to the best of their counterparts
(Kauser and Shaw 2004). They also have to try to position their skills at
higher levels of learning, so that they know not only how to approach
and interpret environmental phenomena but also how to seize
opportunities in an increasingly changing context, without taking on all
the risks. Alliances indeed offer important advantages (Simonin 2004;
Meyer et al. 2009): partners share the risks of the investment and can
accumulate their knowledge, thus creating synergies between the market
and technological knowledge. Costs are limited, and firms can exploit
the advantages of the systemic and dynamic relational network. Working
together, firms aim to achieve a defensible competitive position on
international markets, and are encouraged to develop learning,
innovation, and, above all, market creation opportunities that occur
where synergies can be exploited (Teubal et al. 1991).
For SMEs, above all, alliances expand the strength of a single
business unit, and this expansion allows each component to withstand
scientific– technological challenges, massive investment, and
competitive risks, which are inaccessible (Vaccà 1990). In this context,
the internationalization process is developed not so much by the
individual enterprise, but by a multiplicity of actors linked to one
another, and the level of risk associated with the start-up of an
international development process— closely linked to financial,
technological, and organizational skills, as well as to information costs—
declines. Cooperation also lays the groundwork for reducing
uncertainties stemming from entry into non-family or unknown business.
The sharing of skills generated through networking seems, in such
conditions, to become a more rational solution to the problem.
The process of internationalization of business activities through the
development of cooperation agreements is a phenomenon that has been
accentuated and distinguished over the last few decades by the intensity
and the broad spectrum of the various forms that have developed among
businesses. This is why business collaboration can no longer be
considered as an intermediate form between hierarchy and market, or as
a second- best choice. Not least, they represent an intermediate phase of
41
the internationalization process for the enterprise that evolves from entry
to a foreign market through export to direct investment forms, passing
through transitional forms, oriented towards agreements with
international partners.
In this context, cooperation agreements represent a targeted choice
based on and inspired by the structural and competitive characteristics
and specificities of the international market, the characteristics of the
products and technologies, the capabilities, the organizational structure,
and the dimensions of the as well as the conviction that cooperation is a
viable way of achieving competitive advantages and benefits in line with
the vector of international growth. Therefore, for the enterprise,
cooperation agreements are a flexible organizational form for access to
markets with broader horizons, new technologies, more convenient
supplies, and new outlets to face a competitive clash that has now
become increasingly global.
Looking specifically at strategic alliances, these can be connected to
marketing-sales and after-sales services, or to production and R&D.
R&D alliances allow co-ventures to reduce the risk of exploration of the
“new,” and may permit the ingenuity of innovative ideas in the event of
the presence of capital-bound partner alliances. Alliances can also
involve production and productive coalitions, and above all asymmetric
alliances,
offering partners the possibility to increase their knowledge and foster
innovation, so as to create a higher barrier to the entry of new
competitors. Alliances of this kind, in spite of their complexity, are
replacing the simplest, “old” forms of licensing and patents.
Forms of marketing, distribution, and after-sales agreements are often
the result of a more complex collaboration than a technical–productive
alliance. The aim of this cooperation is to develop synergies among the
specific business skills of companies, especially if partners work in local
areas characterized by different behaviours and cultures. With regard to
the increase in organizational and managerial complexity, which is
reflected by the transition from the simplest forms of collaborative
typologies to strategic alliances, it should be noted that in trade-oriented
forms, current market transactions may include types of offsets or
42 A. Calvelli and C. Cannavale
triangular compensation agreements that require complex deals and the
long- term involvement of partners in the agreements. It should also be
noted that these business cooperation relationships, even in the most
complex forms, remain within the scope of typical countertrade
transactions; they are resolved in the performance of the obligations
deriving from the contracts governing the relationships, which represent
the very essence of transactions.
Countertrade
The simplest forms of business collaboration agreements are those of a
contractual nature, in which the relationship between partners remains
bound by legally sanctioned rights and obligations. The formal
agreement derives from the specific performance provided by the
contract that represents the transactional relationship’s very reason for
being.
Countertrades—in their various forms, such as Barter, Counter-
Purchase, buyback, Offset, and Turnkey investments—are often used to
enter developing and emerging countries, above all when barriers to
international trade exist. In this regard, however, it should be noted that,
in the face of high usage of countertrade from major developing
countries, by the end of the 1980s, the transformations occurring in
Eastern Europe and the evolution of many third-country exporters (e.g.
Indonesia and Malaysia) have much reduced the use of this tool in favour
of monetary payment techniques (Forker 1996).
The factors that contribute to the expansion of the phenomenon are
obviously to be sought in the specific situation of each country, such as
indebtedness, limited availability of currency, non-convertibility of the
local currency, and the need to develop local industries. The main
reasons forcing companies to use countertrade in international commerce
must be broken down into several categories:
– Market reasons explaining countertrade use in terms of increased
sales, consolidation of market shares, entry into new markets, and
taking root in regional markets where they had no previous
experience;
– Logistical reasons in the sense that countertrade can be used by
companies that want to rid themselves of surplus stocks of raw
materials and finished products;
– The search, in strongly integrated companies, for constant conditions
of convenience in the supply of cheap raw materials against payment
in finished products (Lecraw 1989); and
– The attempt to overcome barriers to entry or export in some markets.
The reasons of convenience that may encourage developing countries
to use a countertrade may also be based upon:
– Overcoming international price agreements, since the payment of the
commodity does not have direct effects on the market price, which
is thus not affected by such transactions (Hennart 1990);
– Overcoming trade controls, such as payment of goods against goods,
makes it easier to overcome customs controls often imposed on
certain types of goods.
However, access to countertrade forms is not risk-free. For Pellicelli
(1990), countertrade increases the risks and costs of transactions, as
trading requires both longer information gathering times and the
presence of specialized brokers. In addition, for that author, the
development of
international exchange would also be hindered, because when a country
imposes countertrade trading on the seller, other countries lose market
share and are motivated to do likewise: renouncing experiences on
foreign markets would reduce the possibility of expanding exports.
Beyond the macro-level disadvantages, for entry into some countries,
and especially for currencies that are non-convertible and have difficulty
obtaining financial resources, the countertrade represents one of the few
easy-to-use modes at lower risk.
There are several types of countertrade, from the simplest,
compensated, and contracted, to the most complex, buyback and offset.
In general, the logic underlying a countertrade contract provides for an
agreement involving the transfer of tangible or intangible assets as a
condition for the purchase of goods and services (Pellicelli 1990).
 Outsourcing and Reshoring
The simplest type of countertrade is offset, considered the most
current variant of barter with the introduction of a value, expressed in
currency, of the traded goods. It may also include a transferable currency
movement (partial offset) by the foreign customer, to partially cover the
value of the goods imported by the primary exporter.
The contract, which regulates the reports, shows the characteristics of
the goods to be exchanged, the prices, the quantities, and the duration of
the transaction, generally short.
Foreign customers (or secondary exporters) are, in general,
companies from less developed countries, and since export flows from
foreign customers can be divided by the maximum time established in
the contract, it is often necessary, as a guarantee for the entire operation,
for a trustee bank to intervene in the compensation, with the task of
“memorizing” the transactions of exchange between the operators in
specific clearing accounts, while highlighting the credit and debit
relationships of the parties that arise upon the various deliveries of the
goods. The currency in clearing accounts—which are basically accounts
opened for the partners in the agreement (“their” accounts) and report the
credits and debts that arise whenever an export flow is made from one
partner to another—is to be considered soft currency. Generally, the
counterpart products are not “familiar” to the primary exporter, which
may not have the necessary knowledge for their marketing: in this
situation, a commercial intermediary, often a trading company, gets
involved in the transaction and sells
the counterpart products on international markets in order to have the
money for the primary exporter while keeping a percentage for itself.
Counter-purchase is the most common form of compensation,
especially in Asian countries. In this case as well, the primary exporter
agrees to receive, in partial or total payment for its supplies, the goods of
the foreign customer, often presented on special lists; however, unlike
what happens in barter and compensation in the strict sense, the counter-
acquisition involves the drafting of two separate and parallel contracts.
The first contract concerns primary export, and all the characteristics of
the supply are reported; the second one concerns the commitment of the
primary exporter to purchase the partner’s products, and establishes only
43
the counter value and the type of goods that must constitute the supply
to be counter-bought (or the types indicated in a pre-established list). As
a consequence, the foreign client in charge of selling counter products,
has a big advantage and can exploit moments when commodity
quotations are high to send a smaller amount of goods.
There are various reasons that may encourage an operator in
industrialized countries to accept a counter-purchase as condition for its
exports; this occurs, for example, in cases where an incorrect
programming of the production to be marketed has been carried out; the
products are obsolete for their own market, and the counter-purchase is
used as the first instrument of entry into markets not easily penetrated
through more consolidated methods, such as exports.
The switch originates, generally, when bilateral agreements have
been put in place between the countries (Clearing Agreements). The
bilateral agreements have a contractual nature and provide for the
formulation, for each country that is party to the agreement, of lists of
products (or services) exchanged between the parties, valid for a certain
period of time. The lists show, for each country, the type of goods
accepted in the exchanges, and the total value admitted to the exchange,
segmented by single export flow and by maximum value accepted for
each flow.
Upon the expiry of the period established in the Clearing Agreements,
the uncompensated balance must be paid in a hard currency, and this
condition clearly shows that the presence of a bilateral agreement creates
the conditions for the entry, in compensatory transactions, of third-
country operators.
The supply of “turnkey” plants, machinery, and equipment of high
value: the primary exporter receives in return, in partial or total payment
of the supply, the goods obtained from the plant or from the machinery
sold by it.
These operations are differentiated from other, more strictly
“commercial” compensatory transactions, because they arise from a
broader intergovernmental agreement, involve entities of international
importance, and entail significant contract values and long-term
execution times. There are also quite frequent cases in which the transfer
44 A. Calvelli and C. Cannavale
of technologies is accompanied by the establishment of an equity joint-
venture between the foreign customer and the primary exporter, aimed at
managing the plant and marketing the products obtained from it.
Such agreements are often used in the oil industry, but above all in
cooperation with industrializing countries, since the productive coalition
is often forced by necessity to obtain legitimization from the local
government authority to operate in the host country: the benefit derived
from this form of agreement is implicit in the facilitation offered by the
host country, which makes these forms of internationalization less
expensive than other modes of entry into the local market (Valdani
1991).
The use of countertrades may appear to be of little benefit to
companies in advanced countries, and yet it is possible to identify a
number of reasons why these companies use various forms of
countertrade:
• Market reasons explaining the use of countertrade in terms of
increased sales, consolidation of market shares, entry into new
markets, and taking root in regional markets where no previous
experience has been gained
• Logistical reasons, in the sense that the countertrade can be used by
companies wishing to free themselves from the surplus of stocks of
raw materials and finished products
• The search, in highly integrated companies, for constant conditions
of convenience in the procurement of cheap raw materials against
payment in finished products (Lecraw 1989)
• The attempt to overcome entry or export barriers in some markets
The Role of the Institutional Context and of Market
Commitment in Firms’ Entry Choices
While entry choices can have different natures and take on different
levels of financial and organizational involvement, they represent a key
component of internationalization strategies, and different theoretical
and empirical studies have focused on this issue (Shaver 2013). Various
scholars, in interpreting this choice, have obtained different results, and
empirical evidence is not easy to interpret and revise (Cannavale and
Laurenza 2017). This field of research owes its origins to three main
backgrounds: economic theories, theories of FDI, and internalization
theories. However, the recent trend has been to adopt a more eclectic
approach and to involve strategic and behavioural variables as well. The
traditional contributions made for entry mode focus on transaction costs
theory (Williamson 1985, 1991), on monopolistic advantage theory
(Hymer 1976), on internalization theory (Buckley and Casson 1976a, b),
and on Dunning’s eclectic paradigm (1979). These contributions
consider the foreign investment decision as a rational process based on
the costs and advantages of outsourcing activities in foreign markets.
More recently, contributions have referred to the resource-based
perspective (Meyer 2001) and focus on firms’ ability to move and to
strengthen both internal and external resources and capabilities, which
are rare and difficult to imitate or substitute (Barney 1991, 2002).
According to this line of thought, the decision to internationalize is based
mostly on internal factors, and on the quality and quantity of resources
and competencies. However, a strategy is the result of an internal and
external analysis: both environmental and firm-specific factors are
important in deciding strategic goals, and also in choosing the right way
to attain them (Hill and Westbrook 1997). When the strategy is an
internationalization strategy, external and internal factors are important
for deciding where to invest, and what kind of investment the firm should
make. A new input to the interpretation of firms’ entry choices derives
from application of institutional theory, and from the consideration of
cultural values as something affecting international relationships and
managerial practices (Brouthers 2002; Arregle et al. 2006; Brouthers and
Brouthers 2001). According to the authors, entry choices are often driven
by a combination of transaction cost variables and institutional and
cultural characteristics. All operations outside domestic boundaries
involve interaction between different systems of cultural and social
values; moreover, including cultural variables in international business
studies implies that cultural differences between countries increase the
costs of firms’ entry into host countries, and inhibit the ability of
 Outsourcing and Reshoring
companies to transfer knowledge and skills (Palich and Gomez-Meja
1999).
However, literature on the topic is not thorough, above all because
previous studies focus on MNCs, or use the same theoretical framework
to explain SMEs’ entry choice in foreign markets. SMEs show particular
characteristics that can influence entry choices in international markets:
the lack of financial resources, and ownership and management features
that seem to affect the level of resources committed and the degree of
risk SMEs can afford in internationalization process. Furthermore, some
studies point out that frameworks developed for MNCs are not always
able to explain SMEs’ choices, above all in situations of high degree of
uncertainty and external pressure (Erramilli and Souza 1995). These
studies suggest that the institutional context is suitable for explaining
SMEs, because of SMEs’ sensitivity to react to external challenges and
because of their resource scarcity (Brouthers and Nakos 2004).
Cannavale and Laurenza (2017) contribute to this debate, focusing on
two main factors: (a) market commitment, intended as the incremental
and sequential commitment of a firm to foreign markets (Millington and
Bayliss 1990; Luostarinen and Welch 1990) and (b) the institutional
context, which is considered welcome or hostile according to the
evaluation of five factors: (1) the extent to which local regulatory
influences the activities of foreign firms in the host country (the extent
to which the state hinders the development of business); (2) state control
(the extent to which the control exercised upon companies distorts
competition); (3) restriction on investment (the extent to which
investment in the economy are directed by the government); (4) the
bureaucracy of local government, protectionism, and fiscal policy; and
(5) the cultural barrier meant as closeness to outsiders and unequal
treatment of foreigners (the extent to which foreigners are treated
unequally compared to local citizens, and cultural boundaries).
The authors state that, above all for SMEs, entry choices depend on
the institutional environment and on market commitment. The
institutional environment can represent a limitation on firms’ entry
choices above all in emerging markets and economies in transition.
However, firms’ action not only depends on external factors alone but
45
also on the extent of firms’ involvement in international activities, and
on their previous experiences (market commitment).
Relying on the institutional literature (DiMaggio and Powell 1983;
Kostova and Roth 2002; North 1990; Ferreira et al. 2009; Peng et al.
2008; Scott 1995; Amburgey et al. 1996; Oliver 1996; Schwens et al.
2011; Cheng and Yu 2008; Li and Peng 2008; Demirbag et al. 2007;
Meyer et al. 2009; McMillan 2008; Delios and Beamish 1999),
Cannavale and Laurenza (2017) distinguish the countries covered in the
analysis as hostile and welcome. They consider as hostile those
countries, which are less open to foreign investments, with demanding
and very strict tax regimes. Considering the transitioning markets, these
countries are generally high-context cultures, where Westerners are
perceived often as culturally distant, and sometimes as a threat (Calza et
al. 2009, 2010, 2013). To the contrary, they consider as welcome
countries those where the tax regime and the interference of governments
are mild, and authorities encourage and attract foreign investment by
introducing a number of exemptions and reducing state holdings. Culture
does not represent a barrier, and interaction with partners and local
stakeholders is much easier because cooperation with foreign company
is seen as an opportunity more than as a risk.
To suggest the right entry choice, scholars combine the kind of
context with market commitment. Commitment is a broad concept
including elements of psychology, attitude, and time (Gundlach et al.
1995). Therefore, market commitment involves not only resources but
also the attitude or intent of the decision makers (Lamb and Liesch 2002).
Market commitment influences entry choice, because different choices
imply different cost levels, risks, and involvement, and require different
degrees of knowledge and experience (Bilkey and Tesar 1977). It may
concern the inclination to build strategic alliances (Cullen et al. 2000),
business-to- business relationships (Zabkar and Makovec Brencic 2004),
and cross-border rela- tionships (Styles et al. 2008).
According to the Uppsala School, internationalization is the result of
a company’s gradual awareness of the opportunities in foreign markets.
This vision is based on the strategic role of intangible resources and
learning: the firm’s transition from a limited exploration of international
46 A. Calvelli and C. Cannavale
markets to a high degree of international commitment depends on the
acquisition of resources (Kuivalainen et al. 2012, p. 448). International
experience has a great influence over the decisions on mode of entry. At
the start of the internationalization process, companies do not have
enough experience, and perceive high uncertainty (Johanson and Vahlne
2009). Following this approach, the authors distinguish high market
commitment, understood as the firms’ aptitude towards investing
resources in foreign markets, from low market commitment, understood
as the search for spot opportunities connected mostly to sales
performance.
According to the proposed framework, Cannavale and Laurenza
(2017) essentially hypothesize that where contexts are hostile and
commitment is low, firms try to limit the risks derived from high
institutional uncertainty and low experience, and the entry choice is
expected to imply low involvement of resources, for example, by indirect
export. On the contrary, if contexts are welcome and market commitment
is high, firms are inclined to stay in the host market for a long time and
to choose a stable and long-term oriented mode, such as FDI. When
contexts are hostile but commitment is high, firms can decide to seek
first-mover advantages, but the risks encourage them to limit
involvement of resources; alliances or joint ventures are the most suitable
modes, and there will be partnership. Last but not least, when
commitment is low but contexts are welcome, firms can act in a learning
perspective, and use the host markets to consolidate their knowledge.
Entry choices will be connected to trade opportunities, and firms usually
transition from less complex competitive modes, such as direct export,
to more complex cooperative modes such as marketing and sales joint
ventures.
4. Outsourcing and Reshoring
Choices of Outsourcing to International Third Parties
Outsourcing activities to international third parties is a way to implement
international development strategies. More specifically, it is a way to
implement internationalization strategies for expansion when
outsourcing is done in markets culturally close to the domestic ones, and
for diversification when outsourcing is carried out on markets distant
from the domestic ones.
As early as the 1980s, studies and research focused attention on sub-
suppliers and on the benefits they brought in terms of greater efficiency,
reduction of sunk costs, and improved access to specialist knowledge. In
particular, starting in the last decade, US companies began, en masse, to
pose the dilemma of “sourcing”—which is to say finding the best way to
procure factors and services. The problem was particularly felt for the
area of the information system (IS); the processes of partial or total
outsourcing of the IS involved numerous large companies in the various
sectors, starting from the pioneering decision by Eastman Kodak, which
made IS outsourcing contracts with IBM, Businessland, and DEC.
The disintegration (vertical and horizontal) of the business activity,
especially in large conglomerates, was also triggered by the
shortcomings due to structural factors that created both high costs for
managing insourced activities, and difficulties in being able to
effectively and efficiently govern corporate complexity. It was also
caused by factors of external change (technological innovations, harsher
competition) that required an organizational downsizing necessary in
order to acquire better competitive positions.
In addition to its faster growth, what sets the current outsourcing trend
apart is the wide variety of configurations it has given rise to. Major
corporations are on the continuous lookout for new outsourcing
opportunities and the types of activities that are outsourced have also
changed; no longer confined to the traditional activities of the tertiary
sector (transport, distribution) or to processing phases generally with
mature technology, they now extend to complete business processes, to
the entire supply chain, and, in high-tech companies, to research and
development as well.
The “forms” of outsourcing also differ significantly from the
traditional purchaser/seller relationship, and crowdsourcing bears clear
witness to this.
The globalization trend in business activities has contributed towards
developing these new processes. In pursuit of the ubiquity of competitive
edge, this trend requires managers to devote more attention to not
 Outsourcing and Reshoring
wasting internal resources on activities that do not help positively
increase the wealth of knowledge accumulated in-house, while
channelling these resources towards activities that can better develop the
entrepreneurial “vocations” and the core factors.
By generating a relational system of knowledge exchanges, the new
forms of outsourcing can offer not just the benefits of optimum control
of resources by concentrating them on the core activities, but also the
advantages of an increased ability to rise along the accumulated learning
curve.
Determinants of Outsourcing Choices:
Beyond the Theory of Transactional Costs
In the classical economic theory of competition, the price mechanism is
the element that ensures the best allocation of resources and the most
efficient mode for negotiating the economic relationships among the
acting parties (Cafferata 1995). From this perspective, price is a datum
outside the environment that cannot be controlled by companies, as if
companies were in no way able to alter market mechanisms through their
own decisions. From the standpoint of the economy of businesses, the
paradigms of classical theory show interpretative limits of
entrepreneurial actions; as early as Williamson (1975), the mechanisms
and determinants influencing decision-making processes already began
to be replaced: companies make choices not only depending on external,
uncontrollable variables, but also depending on the internal resources
possessed and that can be acquired. The price of the transactions
compared with the costs of internal implementation also enters into the
decision-making choices.
The composition and level of resources that the company has been
able to create over time therefore help determine the choices between
hierarchy and market.
In the theory of transactional costs, one may also glimpse a new
variable as a determinant for making decisions: the strategic objective
aimed at minimizing the costs for achieving comparative benefits—if not
competitive advantages—assessed through the economies of total cost
(production cost and transaction cost) that may be achieved in the various
alternatives (Williamson 1979). Therefore, a more dynamic role in
47
governing resources replaces the essentially static behaviour in which the
company regulates itself depending on the trends in such outside
variables as market prices.
Currently, in an international market that is increasingly integrated,
competitive, and contentious, and given the increasingly expanding
competition, the outsourcing choices of business activities should follow
decision- making criteria and mechanisms more focused on the impacts
that every outsourcing choice has on the lines of strategy to be pursued,
and on the projected ability to create value. These criteria, then, are more
complex than those set out by the theoretical conceptualizations of
transactional costs.
In this regard, awareness must develop at companies that every
outsourcing choice, by significantly modifying the structure of the value
chain, can heavily influence the creation of long-term economic value,
and therefore the companies’ very possibilities of survival. This is for
two categories of reasons.
In the first place, the value chain and the entire system it belongs to
may differ significantly depending on whether the individual activities
of reference include
– the costs of the activities acquired from the outside, in the case in
which the company decides to rely on the market; and
– the costs for the tangible and intangible resources acquired by the
company to develop a given activity internally.
Secondly, the contribution of the value chain’s activities to
performance, in terms of both positive returns and cost, may, in a static
perspective, vary considerably depending on the strategic choices made
in the past and, in a dynamic perspective, restrict future choices in
allocating the resources that are possessed.
These are issues that are rather neglected by the economic and
corporate literature, which essentially grounds its arguments on static
comparisons based on the costs to be incurred respectively in the various
48 A. Calvelli and C. Cannavale
options of hierarchy and market, rather than on the expectations of the 1. The financial impact of the activities of the associated
returns brought by the two alternatives. Studies have been based companies on the value chain at the Corporate level.
essentially on the transactional costs, neglecting other possible variables 2. The importance of the associated company in the context of
in explication that can lead to a more dynamic vision of the the group, in terms both of achieved performance and of
appropriateness of insourcing or outsourcing business activities. future potential.
Research has, from time to time, emphasized particular conditioning 3. The associated company’s current and prospective
elements, as general principles of the management economy of industrial competitive position with regard to the environment it works
enterprises considered as a whole, or as particular aspects of the in, taking account of the economic situation and of the level
phenomenon, characteristic only of specific sectors or of specific local of risk present in it.
realities. The considerations made above show the importance of 4. The direct and indirect benefits (opportunities to be seized)
preparing more complex tools for the economic and financial analysis of that may derive from the maintenance or development of the
choices— tools that, in overcoming the static perspective of transactional associated company’s activities.
costs alone, are also suitable for interpreting not only the impact an 5. The opportunities not seized, in the case of outsourcing
outsourcing choice has on the value chain but also the competitive (income/opportunities) the associated company’s activities.
advantages, beyond pure cost levels, that can arise from the different
6. The compromise costs and the coordination costs to be borne
choices.
in the event that the corporation wishes to maintain or develop
Although there are many and at times contradictory points of view the activities of the associated companies, taking account of
with regard to the costs and benefits derived from the outsourcing the level of complexity and of the impact these activities may
choices made on an international level, it may be stated that rational
have on activities and resources at the aggregate level.
outsourcing choices can create benefits in terms of corporate output
7. The possibilities derived from the development, within the
corresponding more with the expectations of demand, better positions to
company, of the knowledge necessary to produce the
be achieved in the competitive setting where the companies operate, and
activities it needs, in terms both of expanding the activities
the development of a greater load of innovation at companies.
already undertaken, and of applying the insourced knowledge
These analyses take on greater complexity when they are done by the
in new businesses to be undertaken.
parent company for decisions to outsource the activities of subsidiaries,
since, in this case, analyses must be performed that take account both of
8. The competitive advantages, beyond pure cost levels, that can
arise from the different choices, in terms of effectiveness, of
the positions reached and planned by the associated companies, with
higher barriers to entry to be erected against potential
reference to the particular competitive settings in which they operate, and
competitors, and of the greater market power that can be
of the overall activities of the corporation, considered in a single
attained with regard to competitors, suppliers, and customers.
systemic vision.
A non-rigorous and partial assessment of the advantages that may
Decisions to Outsource the Activities of Subsidiaries:
derive from an outsourcing aimed at seeking efficiency may lead to
Reference Parameters
critical situations of competitive incapacity or even, paradoxically, to
The following are the most important parameters that should be
situations of lesser efficiency (downsizing can become “dumb-sizing”).
taken into consideration in the corporations’ outsourcing choices.
 Outsourcing and Reshoring
In the first place, for the outsourcing of business activities to develop
successfully, there must be producers capable of guaranteeing the
maintenance, over time, of the quality standards required by the customer
at marginal, non-growing costs. Only in this way, in a dynamic vision,
will it be possible to respect the efficiency parameters that guided the
choice of outsourcing and, at the same time, to limit the risks of
underperformance that might compromise the corporate results,
especially if the outsourced activity is “critical” for maintaining the
company’s competitive situation.
For example, the main problem Western companies encounter when
they decide to offshore their production to certain “difficult countries” is
linked to the procurement of raw materials and components: long delays
in delivery, and low quality of semi-manufactured items create lower
competitiveness of finished products on Western markets. Coming on
top of the procurement difficulties are the shortcomings present in the
technological infrastructures and in the technologies used.
Moreover, the following elements are stressed: the poor professional
preparation typical of the non-industrialized countries, which requires
monitoring even for the performance of less complex activities; and a
smaller or nearly non-existent demand market, also combined, in certain
sectors, with strong local competition from international competitors.
The need to have to monitor the activities entrusted to outside
suppliers—a need that grows stronger as the strategic criticality of the
outsourced activity grows higher—can give rise to monitoring costs that,
if they reach levels excessively burdensome to the businesses’ economy,
may thwart the search for efficiency that guided the entrepreneurial
choices.
On the other hand, the compromise costs—which may derive from
the lesser monitoring performed and from a possible, necessary
adaptation of the core activities to the lesser qualities of the third-party
company’s output—can only condition efficiency and corporate
effectiveness over the long term.
In this regard, empirical research has shed light on the difficulty of
controlling Chinese producers / executives, who are simple government
49
employees, underpaid, and lacking incentives and motivation: in
working life, it is widespread practice among local operators to attempt
to circumvent the directives that are imparted, and not to comply with
the orders’ specifications if they require a greater expenditure of time
and energy.
It also bears noting that every outsourcing choice is accompanied by
a reduced accumulation of knowledge capital, which can be more or less
significant depending on the capacity, inherent in the activity being
outsourced, to develop new knowledge. The loss of knowledge and
experience may also—through a reduction in the flows of internal
communication, especially if informal and uncoded—compromise the
company’s ability to develop the core competences.
It emerges from the above that, in making choices of outsourcing to
outside suppliers, it is necessary to go beyond the theory of transactional
costs, in order to more rationally assess the positive or negative
repercussions that may arise from a given choice.
New Forms of Outsourcing
To strengthen the relationships put in place by a system of outsourcing
to international third parties, through the maintenance by companies of
control over the outsourced activities, the company should focus its
attention at home on the activities of strategic relevance, such as
planning, design, marketing activities, and the trading of the finished
products.
The maintenance of strategic leadership by the outsourcing company
might happen to be supported only through the creation of joint ventures
or, more generally, of agreements with the figures to which the company
has outsourced the activities, if these activities are to be considered
“critical” for pursuing the pre-established strategic objectives.
Many research efforts on this topic have highlighted the presence of
collaborations among companies that have put in place near-integrative
collaborative relationships, based essentially on relationships of trust, in
which outsourcing companies maintain a position of strategic and
operative domination (Calza 2001).
50 A. Calvelli and C. Cannavale
In a more general vision, and in keeping with what was found in the
operative reality, numerous critical factors a company needs to consider
when deciding to outsource have been identified. What is important for
managers is to understand the risks, and to have contingencies in place
to mitigate the risks.
More specifically, in their “make-or-buy” choices, managers should
focus on two main dimensions (Table 4.1): (a) the potential strategic
risks of outsourcing, that significantly affect the achievement of the pre-
set strategic objectives; (b) the potential operating risks of outsourcing,
that negatively impact on the level of operating costs, reducing the
potential benefits of outsourcing.
Both strategic and operational risks are important, and their
evaluation should be taken into account to decide if and how outsource
Table 4.1 Outsourcing risks
Potential strategic risks of outsourcing Potential
operating risks of outsourcing
companies’ activities: high potential strategic risks are critical because
they can reduce the company’s capability to get the strategic aims in the
long- term, while potential operating risks affect the implementation of
the decisions, and can be directly attributed to the outsourced activity,
and to characteristics of the target market.
Four choices consistent with the criteria set out thus far may be
identified (Fig. 4.1).
The first choice (International outsourcing) regards a situation in
which potential operating risks are limited or absent, and the same is true
for potential strategic risks: the outsourced activities should be managed
with spot contractual relationships. The company can exploit the
advantages of
 The Role of Culture in Internationalization 51
– Inadequate protection of– Increased complexity of
intellectual property controlling offshored
– Loss of control over activities
technology with the– Low labour productivity
connected risk of in the host country
counterfeit and/or creation– Lack of qualified
of competitors personnel in the host
– Loss of image of the country
country of origin – Lack of infrastructure
– Limited implementation of– Managerial costs, due to
strategies based on cultural differences and
product/process innovation language
– risk of underuse of the– Increased delivery time
know-how developed in the– Costs due to physical
home country distance between
– Loss of image of corporate consumers and suppliers
social responsibility – Increased production
– Host country’s hostility costs in the host country
(logistics, labour,
taxation)
– Poor quality of offshored
production/customer
service
– Issues related to customs

Source: Our elaboration

or
High Limitedorabsent Potential operating risks of outsourcing
Fig. 4.1 Outsourcing risks and offshoring choice. Source: Our elaboration
economizing, and the low risks do not require stable relationships, which
could limit the exploitation of new opportunities on the host market.
The opposite choice (Insourcing in house) pertains to the case of high
potential operating risks and high potential strategic risks. In this case,
52 A. Calvelli and C. Cannavale
the loss of control could have negative effects for the company, which
risks creating new competitors and or losing the benefits of innovative
activities, especially if the know-how is developed essentially in the
home country. At the same time, the high level of potential operational
risks reduces the economic benefits normally connected to outsourcing,
and together with the former risks, this factor lays the groundwork for an
internalization of the activity, which should stay in the home market.
The other two choices describe particular situations in which the
company must decide if the activity can be offshored or outsourced based
on the two major types of risk that companies face: operating risk and
strategic risk. In one case (Captive offshoring—wholly owned
subsidiary), the choice of outsourcing is based on financial
considerations connected to the limited or absent potential operating
risks concerning the offshoring in the host country. However, the high
potential strategic risks imply the need to maintain control over the
offshored activity, and the creation of a wholly owned subsidiary could
guarantee the dual goals of being rid of financial inflexibility without
losing strategic control over critical resources.
An outsourcing choice of this kind often gives rise to cases of
“guided” international spin-offs (Calza 1996), which refer to that
particular “centrifugal” process that results, especially in the area of
corporate restructuring, in the separation of activities in the value chain
that are less distant from the core business, with the consequent creation
of autonomous economic and productive units in foreign markets rich in
factorial endowments, but with which one in actual operation remains so
as to exercise strategic control Technological progress represents the real
impetus for this new type of outsourcing that finds its level of
innovativeness in gen-erating a self-driving process of developing
entrepreneurship, thus giving rise to new companies being spun off from
those already in existence. In the corporate perspective, the delegation of
authority, which is to say the granting of autonomy to the company’s
peripheral organizations, and the outsourcing of activities or functions to
outside, spun-off units, become the only possibility for the company’s
survival and its technological development. On the other hand, the
process of offshoring by spin-off also owes its strength to the search for
autonomy by those employees who have acquired greater
professionalism and experience (executives and officers), and who
therefore intend to start an activity of their own on the basis of the
acquired knowledge. There is also less business risk, since this type of
spin-off—which, for the particular relational rapport that is established
between the initial company and the spun-off one, may be defined as
“guided”—can count on the parent company’s financial and technical
support, and on its baggage of knowledge.
The last quadrant (Joint venture/long-term contracts—External
suppliers) refers to the case of high potential operating risks and limited
or absent potential strategic risks. The outsourcing of the business does
not entail risks connected to loss of control, but the market’s
characteristics suggest the need to avoid an increase in operational risks.
To limit the risks of an excessive fluctuation of market prices, the
company should establish near-market relationships, that is, agreements
involving specific clauses (allowances) to defend against price
oscillations, multi-year contractual relationships, or joint ventures.
Reshoring and Back-Reshoring
As already pointed out, outsourcing activities (core and non-core
activities) to international third parties is a way to implement
international development strategies and, more particularly, to
implement internationalization strategies for expansion when
outsourcing is done in markets culturally close to the domestic ones, and
for diversification when outsourcing is carried out on markets distant
from the domestic ones.
Recent years have seen a “reconsideration” of the outsourcing
decisions that have been made: many companies in the industrialized
countries that had outsourced productive activities related to goods and
services to emerging countries (above all China and the area of the
countries of central and eastern Europe) are abandoning these markets,
as they have become less attractive due to economizing, hostile actions
carried out by host countries, and incentives to return to the home
territory implemented by the governments of the countries of origin.
 The Role of Culture in Internationalization 53
We are now seeing cases of reshoring—the abandonment of host China (28%)
countries in search of more attractive markets—and above all of back-
reshoring, which describes decisions to bring back to the country of East Central Eu (14%)
origin all or part of the production activity that had earlier been entrusted
to foreign suppliers. Therefore, reshoring and back-reshoring may be
Northern Europe (9%)
considered ways to implement internationalization strategies for re- (7%)
centring, as they were defined in the dispensation on the strategies of
international development.
Most of the abandonments, 168 cases out of 190 considered, show a
return to the country of origin; 148 cases refer to the outsourcing of
production.
The countries being abandoned (Fig. 4.2) regard the Asian area and
in particular China (28%) which, on the other hand, had been the target
country of prior outsourcing. The phenomenon is quite substantial for
Europe companies that have outsourced to the area of the countries of
Central and Eastern Europe (14%). The reasons underlying the return are
connected with operating costs (poor quality of off-shored
production/customer service, increased production costs in the host
country), with the need to remove strategic risks (loss of image of
country of origin, the possibility of making better use of know-how
developed in the home country, inadequate protection intellectual
property), and with a public policy incentivizing the settlement of
companies in domestic territory.
As concerns the countries of origin of the companies leaving the Fig. 4.2 Share of European companies that have carried out reshoring and
countries where they had outsourced, out of 190 cases examined, 22 back- reshoring: countries being abandoned. Source: Our processing
companies reshored and 168 returned to the home country. Companies from European Reshoring Monitor—April 2018
from the United Kingdom (18%), Italy (17%), and France (12%) have
reshored and back-reshored, as against 4% from the United States (Fig.
4.3).
54 A. Calvelli and C. Cannavale
France (12%)
Fig. 4.3 Reshoring and Back-reshoring of Italian companies: Countries
that leave. Source: Our processing from European Reshoring Monitor—
April 2018
As regards Italy, 12 companies out of 31 are reshoring from China,
while 5 abandonments originated in Central and Eastern Europe. Italian
companies in the mature technology sectors had outsourced production
to emerging countries in order to exploit the advantages of low labour
costs, but now many entrepreneurs, despite the tax-related, bureaucratic,
and systemic hurdles making return difficult, are implementing back-
reshoring, due to increased logistic costs, increased production costs in
the host country, untapped production capacity at home, implementation
of strategies based on product/process innovation, and, not least, an
orientation towards relaunching “Italian-made quality.”
At times, it is the trade associations themselves, such as Assosport,
for example, that encourage associated companies to return to the
domestic market. Assosport’s moral suasion has in part contributed to
bringing back to Italy: Aku, a producer of trekking footwear, which left
Romania to return to Montebelluna; and Masters, one of the major
worldwide producers of ski, trekking, and Nordic walking poles, which
left China to return to Bassano del Grappa.
5. Key Risks of Internationalization The Risks of
Internationalization: An Introduction
The planning of an internationalization strategy is based on an analysis
process that aims to identify the target markets, assess the opportunities
and threats characterizing them, and determine the most suitable mode
of entry. This complex process has to combine the resources and
competences the company has with the opportunities and threats
characterizing the target markets. This is not a linear and standardized
process: psychological distance, the gap in development levels between
the home and host market, language barriers, and the social/institutional
context of the destination country are all factors that strongly impact the
analysis’s difficulty and intensity. However, it is a fundamental moment
in strategic planning, also in the case where the choice to internationalize
derives from the emergence of spot opportunities for the company. When
players don’t acquire adequate knowledge of the target market, they risk
failing to grasp the threats existing in them, or the barriers that can limit
these markets’ attractiveness.
Identifying target countries cannot occur separately from analysis of
the risks and opportunities present in the potential markets; it is a phase
of analysis focused on the outside environment and aimed at verifying
the presence of barriers or risks that might reduce the opportunities
potentially present abroad. From this perspective, it is necessary for the
company to carefully assess the specific potentials and risks of the
individual markets and the degree of attractiveness of their businesses.
 The Role of Culture in Internationalization
Although this assessment cannot be done without analysis of the
macroeconomic picture—which allows the company to estimate the
impact that the macro-environment’s individual forces may have on its
activity and profitability—it must also consider soft factors connected
with the presence of different beliefs and values that can condition
consumers, the work ethic, and the propensity for collaboration with
outside players. From economic indicators (e.g. GDP, per capita GDP,
unemployment rate, and inflation), the company obtains information on
the economic phase in progress in the country, the consumers’ buying
power, the presence of low-cost labour, the state’s role, and the presence
of laws hindering or facilitating investment. And from social and
demographic data, it gains a picture of the potential profiles of
consumers/ workers present in the country. This analysis, although
summary in nature, may be useful for understanding the stratification of
the population, the presence of certain segments of interest for the
company (just consider products requiring particular levels of literacy,
or that target particular age groups), the level of qualification of labour,
and the system of motivations the company can exploit to create a spirit
of belonging to the organization and envisage career paths that make the
most of human resources.
The company must be able to quantify the chief risks characterizing
these elements. To view the phenomenon schematically, it may be stated
that the first moment of analysis considers the available country risk data.
This may have major repercussions on the profitability of the investment,
on the capacity of local debtors to honour their debts and on the
company’s ability to recoup investment over time, as well as on
investment risk, connected not only to the market’s economic potential
but also to the presence of cultural factors that can negatively influence
the company’s performance. The company must deepen the level of risk
analysis, identifying the impact that financial variables, in addition to
political and social ones, can have on their specific business.
The intensity of country risk, as a broader case of counterpart risk, is
obviously amplified in those countries that lack regulatory and financial
institutions capable of protecting foreign creditors. Consider, for
55
example, the possibility of a country being exempted from the obligation
to comply with contractual clauses, or the hypothesis in which a contract
contains clauses in breach of current law that are therefore null and void
for local law. Situations of this kind create daily problems for businesses,
especially small ones, that export to international markets, and can only
be reduced a priori, through adequate analysis of the regulatory system
and, hence, through identification of clauses referring to the rules in force
or establishing the use of international arbitration (obviously in the
signatory countries of the conventions on the subject). Country risk
assessment comes on top of the assessment of financial risks associated
with internationalization. These risks, in the simplest assessments, are
related to exchange rate trends and to the possibility that the presence of
administered economies or the impossibility of using some payment
instruments will increase exposure to price risks. The size of these risks
depends on certain factors connected with the sector the company
belongs to and to the sources of competitive advantage, but is generally
higher today than in the past due to the growing degree of
financialization of the economy, and consequently of companies.
In any event, the risk assessment is not generally aimed at the
exclusion of a given market a priori. In fact, to reduce entropy risk,
companies do not tend to exclude certain markets to the benefit of others,
but to seek— in order to minimize the risks—the ways most suited to the
specific characteristics of the individual markets.
The Financialization of Companies
At the macroeconomic level of the development of the financial
activities of international companies, there are multiple determinants of
the new role taken on by finance in decision-making choices, and of the
birth of new financial instruments in support of both strategic and
operative choices.
The evolution and pervasiveness of the new technologies of
information science have expanded the boundaries of competition
between companies and among sectors; changes in the competition
landscape have required a different response from companies and, from
56 A. Calvelli and C. Cannavale
this perspective, have helped develop a new role of corporate finance,
seen as a source of competitive advantage for international companies.
Operators in the different capitalist settings now find themselves
dealing in different markets and in different securities and currencies,
operating in one market in order to invest in another—and developing
policies of arbitrage and speculation in stock, bond, and currency prices.
In addition, the changed competitive landscape and globalized financial
markets have led companies to centralize the operative management of
flows in foreign currency, and therefore exchange risk, with the
possibility of the hedging and matching of differently oriented positions,
and of using such instruments as swaps and options.
Large-sized and corporate enterprises have developed greater
knowledge in financial matters and are currently particularly attentive to
converting securities in foreign currency, to the differences between
domestic and foreign tax systems, and to the interrelationships between
transfer prices and taxes, and among transfer price policies, financial
profits, and competitive advantages.
It is by no means easy to identify the direction and intensity of the
relationship between level of integration of the markets (and especially
financial markets), and technological development. It bears observing,
however, that since the first introduction of the Reuters display in 1973,
there has been a considerable increase in the development of the market
integration process that began with the crisis of the Bretton Woods
system of fixed exchange rates.
In connection with technological evolution, it bears pointing out that
the globalization of markets (of goods, factors, and capital), understood
as the strong interaction of markets, in requiring a faster process of
companies’ adaptation to an articulated and complex environmental
setting, has also created new opportunities to be grasped. It has at the
same time raised the need for more, and more flexible, financial
resources.
In recent decades, every country essentially had a single financial
market, in which the different types of instruments circulating in it were
exchanged. In this atomistic and highly public law–oriented conception,
the operators on the financial market were seen as public institutions at
the service of private individuals, and not as companies producing
services and themselves the object of entrepreneurial initiatives.
Therefore, the interaction of financial markets has overturned the
atomistic conception, bringing about, on the macroeconomic level, a
systemic market vision. Although internally articulated with regard to
the operators’ behaviours and regulations, this vision should be
considered from a unitary perspective with regard to interconnection
among the decisions undertaken locally, and in terms of the
supranationality nationality of the effects derived from these decisions.
Moreover, considered as a search for the ubiquity of competitive
advantage, globalization has resulted in focusing managerial attention on
new decision-making problems regarding the location of the business
activity, the creation of often captive financial companies, and the
acquisition of currency and tax benefits depending on the regulatory
differences that exist in the different countries in the matter of inter-
company relations and transfer of income.
The fall of the exchange monopoly and of the bank “channelling” of
foreign transactions contributed to developing a systemic logic in
interpreting financial movements on financial markets. In the common
financial space, the competitiveness of financial markets introduced by
international unification entails an allocation of capital done with a view
to comparative advantages, and thus to arbitrage among the various
opportunities that are manifested in the individual markets;
competitiveness means that financial exchanges may concentrate in the
markets that are most efficient in terms of costs and risks related to the
different transnational activities undertaken.
The Role of the Function of Finance in
Internationalized Companies
In this perspective, finance has broadened its field of action, involving a
number of different areas/themes within it, such as
 The Role of Culture in Internationalization
– the planning of medium- and long-term financial flows regarding the
policies of international investment and the related policies of
choosing the sources and types of financing;
– the choice of criteria for assessing the current and prospective
conduct of the activities of international concerns;
– multi-currency treasury management, which is to say the
management of cash surplus/deficit generated by financial
movements in currencies other than the national one;
– the decision-making choices and the hedging techniques to be
adopted to face the risks derived from uncertainty over future
variations in financial variables;
– actions aimed at taking advantage of the opportunities derived from
the existence of anomalies in financial markets; and
– actions aimed at taking advantage of the opportunities derived from
the presence of different tax burdens in the various countries,
through suitable policies of transfer prices for goods and services
between the parent company and associated companies.
The greater financialization of business activities results in an
increase— in both intensity and volume—in the economic and financial
risks companies are exposed to. Albeit aware that not all risks can be
totally eliminated, it is necessary for companies to learn the effects
resulting from exposures to different types of risk.
In the first place, international companies must increasingly acquire
a capacity to control market risks, which is to say those risks to which
economic operators are exposed as a function of unfavourable variations
of the prices of the underlying activities. Market risk, then, is the risk an
internationalized company’s economic and financial situation is exposed
to depending on unfavourable variations in the market prices of financial
activities: exchange rates, commodities and securities prices; interest
rates.
Secondly, companies that operate above all in emerging countries
must acquire an ability to “control” the credit risks linked to the
57
possibility that the other party in a financial operation might not meet the
obligation taken on by the deadlines and under the conditions provided
for by the contract.
It bears noting here that in cases where there is a high possibility that
a defaulting party’s crisis situation will spread by “domino effect” to
other operators, the company’s risk exposure increases: the other party’s
credit risk enlarges to become systemic risk, which includes the case of
country risk.
Given the growing importance of business finance activities and the
repercussions erroneous conjectures may have on the trend in financial
variables, the problem is raised of identifying companies’ behaviour with
regard to the variability of these magnitudes. These magnitudes’ impacts
on economic and financial equilibria may be verified after the fact, and
the likely repercussions estimated beforehand.
In response to expected fluctuations in financial variables,
management must seek to act in a timely fashion, concerning itself with
limiting or, if possible, nullifying the potential negative economic
repercussions connected with their unfavourable trends. Contrariwise, it
must also seek to seize the opportunities arising from certain
expectations since, with the aid of suitable financial instruments—such
as financial arbitrage, repo operations, and more innovative instruments
like derivatives—the irregularities present in financial market trends
may also present an additional source of increased corporate income. The
dichotomy of the results leads, then, to defining exposure to market risk,
unlike credit risk, as a “two-way-risk.”
Among financial variables, particular attention must be given to the
foreign inflationary component (exchange rates); exchange fluctuation
generates a dense network of interrelationships with retroactive effects
leading to variations in the prices of the factors and goods, modified
market demand, changes in the levels and structure of interest rates, and
imbalances in the companies’ economic and financial circuits.
As regards interest rates, uncertainties over their medium/long-term
variations have led credit institutions to adopt particular actions to hedge
against financial risk, such as cutting down the duration of loans,
58 A. Calvelli and C. Cannavale
replacing the fixed-rate system with indexed rates, and reviewing loan
conditions more quickly. Moreover, the shorter duration and indexing
are also the levers used by the issuers of fixed-rate securities, for the
purpose of conquering increasingly large segments of the market of
savers.
Fluctuations in the financial variables have an impact on corporate
performance that is not homogeneous for all companies in any sector,
but varies depending on
– the relevant sector, its structure, and therefore the intensity of
competition; and
– the regulations, in the markets of origin, of the productive inputs and
of the destination of market outputs.
The mode of implementation of companies’ internationalization
strategies can also influence the connections between financial markets
and corporate performance, if one considers, for example, that the
passage between forms of competition and of collaboration may also
bring about supplier/customer agreements aimed at a more equitable
division of market risks.
Therefore, it is unthinkable that the management of international
companies might let costs and revenues expressed in a foreign currency
(with the single currency in Europe, foreign currency refers to non-EU
countries) fluctuate freely, and not decide, in response to unfavourable
fluctuations, what market risk management policy to implement; this
becomes even more important for multinationals, whose branches, often
operating in weak-currency markets, may record losses or worsened
competitive positions that cannot be linked directly to the parent
company’s governance policies, or to the branches’ decisions concerning
the activities included in their sphere of responsibility.
In the case of prices for raw materials, management has developed
increasing awareness of the vital role played by the function of
procurement; this is in light of the imbalances created following the
gradual decentralization of production, and the increased internal
variability of the supply markets. In response to price increases, or to
expected increases, management streamlines stocks of materials on the
one hand, while on the other hand seeking to establish relationships, or
types of strategic alliances, with suppliers; the aim is to guarantee the
quality of the purchases, to contain price variations within given time
frames, and to meet delivery deadlines.
The moment of purchase is a moment of indirect assessment of the
company’s effectiveness of operation, understood by the customer as the
organization’s ability to achieve a better trade-off between price and
product quality attributes of importance to consumers in accordance with
their scale of relative importance; on the other hand, the choices made
by consumers in a given segment provide clear proof of the effectiveness
of the marketing programmes developed by management in for that
particular target market. From the standpoint of marketing actions, price,
also considered in its relationship with the quality that may be perceived
by the consumer, becomes, for the planner, only one of the decision- Key
Risks of Internationalization
making variables to be used to modify given market situations to one’s
own advantage; this means that for a given asset there is what Panati
(1987) called the “firmament of prices,” a “phantasmagoric
kaleidoscope” that disposes the consumer to paying more for a product,
not different from others present on the market, but differentiated from
them in terms of brand or the image that the producing/retailing company
has been able to create over time.
“Purchase marketing” activities make it possible to achieve, at the
same time, the objectives of lower levels of safety stock, reduced
inventory stocking times (obtained by bringing arrival dates closer to the
dates of use at the factory), and, in the final analysis, lower pressure on
corporate cash flows.
In this regard, the managerial problem that the corporation is called
upon to face takes concrete shape in the choice of hedging policy to be
implemented or, lacking a hedge, in the orientations to be given to the
branches, ensuring the achievement of the strategic objectives pursued
both centrally and peripherally.
To respond efficiently and effectively to financial market turbulence,
management must, in the first place, learn how to find out the
 The Role of Culture in Internationalization
relationships between financial variables and corporate performance. It
must then learn how to “make conjectures” on the future trend in these
variables, in order not to find itself unprepared to deal with events or,
conversely, for to try and exploit opportunities as they arise.
It is in this phase of the company’s relationship with its environment
that the interrelationships between efficiency and effectiveness in
entrepreneurial action are closer and more evident.
Creation of Supervision Nodes
As stated, coordination difficulties increase considerably in situations of
mutual interdependence, that is, where internationalized companies
operate with a view to the systemic interconnection of the effects found
in the various environments in which the associated companies are
located.
Where there is a complex system of relationships, it may be useful,
for more efficient and effective control and governance of the
corporation’s financial activities, to cut the network of connections
between the parent company and decentralized units, and to create
“supervision nodes” to be tasked, under the control of the parent
company or peripheral unit, with coordinating the associates’ activities
that fall under their respective spheres of action.
Through the creation of “financial nodes” often located in a market
that is particularly attractive in terms of less restrictive policies on
controlling the activities of the companies operating in it, geographically
disperse multinationals can obtain financial profits by centralizing the
management of the associates’ financial activities.
One example of a supervision node is that of the reinvoicing centres
whose purpose is to centralize, within themselves, procurement for
groups of associates, with the consequent economies of cost derived
from the increased bargaining power that a centre can obviously have.
It will then be the centre that invoices the associates, depending on
the flows of goods sent to them. Generally, invoices are made by the
centre in the associates’ currency and, in that way, the centre, by
centralizing exchange risks within itself, can manage the entire group’s
59
multi-currency treasury. By this technique, a more orderly group
currency policy is pursued.
Reinvoicing operations have the benefit of avoiding some local
resistance to the parent company’s strategic choices and offer the
possibility of extending compensation mechanisms to operations
concluded autonomously by the individual associates with outside
customers.
The reinvoicing centre can also pursue transfer price policies, with
the term “transfer price” to be understood as the price paid by an
associate to the parent company, or to another associate or the
reinvoicing centre, for the transfer of raw materials, components,
intermediate products, or services.
From the technical standpoint, transfer prices are one of the most
complex problems to be solved in the management of multinationals,
since if the cost of the transferred products/services could be determined
with certainty, in all its components, problems of estimating the transfer
prices would not arise. On the other hand, some costs are, by their very
Key Risks of
Internationalization
nature, difficult to divide among the associates (e.g. consider research
costs).
The transfer prices to be attributed to the flows of goods transferred
from a reinvoicing centre are set basically as a function of the purposes
pursued by the centre or the corporation.
Prices may be lower than those charged on the associate’s market,
when the local competitive situation is rather intense, or when the
associate is in a start-up phase and must seek to achieve possible
competitive positions as quickly as possible. In this case, the reference
price’s parameter of reference can be the cost incurred by the centre,
which discounts economies of scale, or even a lower price of the
procurement cost borne by the centre.
60 A. Calvelli and C. Cannavale
If the centre is unable to bridge the cost/price gap by means of higher
transfer prices attributed to other associates, it will suffer fictitious
losses, ascribable exclusively to the pursued price policy. The associate
so favoured will earn fictitious profits not attributable to the operational
conduct of local managers, while the associates in a situation of higher
transfer prices of course earn less profit.
Profits are thus transmitted from (favoured) associate to associate,
and this is why transfer price policies implemented by corporations often
cause intra-organizational conflicts, especially if the peripheral
managers are judged (and paid) on the basis of locally earned profits.
In situations where the corporation’s policy is centred on a more
neutral assessment of the associates’ performance, from an equidistant
perspective, the criterion followed by the centre may be that of assessing
the transferred goods on the basis of the corresponding prices charged on
the individual local markets. The formation of fictitious losses or profits
can thus be avoided, and it will be the centre that obtains a profit (or,
unrealistically, a loss) as a sum of each associate’s cost/price gaps.
The transfer price policy also pursue other goals, such as:
– Earning, through higher transfer prices of the goods, low profits
where the tax system is more rigorous; conversely, the centre will
seek to earn higher profit where the tax system is less rigorous, in
this case by transferring lower prices—lower than the transferred
goods’ cost on the local market;
– Attenuating the effects of restrictions on movements of capital,
dividends, and royalties; reducing the effects of nationalization,
should this take place;
– Greater influence not only on taxation but also on duties and,
therefore, on the price of raw materials or semi-finished products,
when duties are applied to imports on the basis of the value of the
products transferred from one country to another.
It is lastly to be pointed out that it is becoming increasingly hard for
multinationals to practise transfer price policies, since (Pellicelli 1990)
– the differences among tax systems are continuing to diminish,
especially in industrialized countries, and there are therefore fewer
incentives to transfer profits from one country to another;
– tax administrations are increasingly attentive and attuned to these
procedures that may reduce their tax revenues;
– the assessments of the associates’ results may be distorted if the
transfer price policy has objectives different from that of calculating
actual cost (assessment of the branches’ activity).
Financial Risks and Counterparty Risks
The greater financialization of business activities increases, in intensity
and volume, the economic and financial risks to which companies are
exposed. While aware that not all risks can be totally eliminated,
companies have to learn to recognize the effects derived from exposure
to different types of risk.
In the first place, international companies must increasingly acquire
an ability to control market risks, which is to say those risks to which
economic operators are exposed as a function of unfavourable variations
of the prices of the underlying activities. Market risk, therefore, is the
risk to which an internationalized company’s economic and financial
situation is exposed as a function of unfavourable variations of the
market prices for financial activities that, excluding the financial
variations linked strictly to speculative movements (values of the stock
market indices), are exchange rates, commodity and security prices, and
interest rates. The risks connected to the trend in financial variables are
two-way risks: proper financial management must take account of the
need to be protected from unfavourable variations, but must also
consider the opportunity cost of any hedging; and therefore the
possibility that these hedging operations might preclude the ability to
exploit any positive variations in these variables. From this perspective,
it may be said that financial risks (different cases in which market risk is
articulated) cannot be limited: hedging policies allow companies to
transform the uncertainty connected to the variation of financial
 The Role of Culture in Internationalization
variables into a calculated risk, and thus to limit exposure to the negative
effects that may derive from them.
In the second place, companies that operate above all in “difficult”
markets must acquire an ability to “control” credit risks, connected with
the possibility that the counterparty in a financial operation might fail to
meet its obligation by the deadlines and under the conditions provided
for by the contract. In this regard, it bears noting that in cases in which
there is a high possibility for a defaulting party’s crisis situation to spread
by “domino effect” to other operators, the company’s risk exposure
increases: counterparty credit risk expands to become systemic risk. One
last case of counterparty risk is country risk, understood as the possibility
that a debtor defaults due to causes beyond the individual’s control,
involving a country’s institutional sphere.
Looking specifically at managing financial risks, financial
immunization has the purpose of reducing the risks underlying the
variability of prices, exchanges, and interest rates. If hedging techniques
are systematically adopted for all at-risk operations, the company
eliminates, or at least “controls,” a “calculated” risk, the riskiness of the
negative repercussions on management results caused by fluctuations in
financial variables. Over the long term, hedging lowers the likelihood of
encountering financial crises, thereby reducing the variance of the
company’s value (Mayers and Smith 1982; Smith and Stulz 1985). The
use of hedging instruments has increased considerably in all financial
markets, and the significant development recorded by derivatives is
cause to suppose that these instruments have replaced the more
traditional forms of hedging (defensive contractual terms, fixed-term
contracts, insurance coverage).
The problem is raised of the determinants that lead companies to
cover their financial risks, and that cannot be ascribed to a generic risk
aversion which theoretically explains the choices of individuals in a
society more than those of institutions and companies.
As Modigliani and Miller taught back in 1958, portfolio theory
maintains that corporate hedging cannot benefit the shareholders,
because it does not lead to reducing the cost of capital; in fact, since
61
shareholders can diversify their portfolios, the reasons for a company to
perform hedging actions in order to safeguard shareholders from
financial risks no longer apply.
However, it bears noting that in a traditional perspective and on a
macro level, the possibility of reducing risks through portfolio
diversification was recognized only for investors that could operate in
markets offering a wide array of stocks to invest in. In fact, it was
maintained that when shareholders were operating in environments
marked by diffuse stockholding, typical of settings dominated by the
separation between ownership and control, they could effectively take
advantage of diversification opportunities. An efficient and multi-sector
financial market could offer a broad choice of stocks to hold, and thus a
higher portfolio flexibility depending on the opportunities as they arose
on the financial market.
It was also maintained that shareholders could not carry out an
efficient diversification of their portfolios when the market concentrated
capital in the hands of a majority interested in “controlling” business
activity. If on the one hand this kept outside third parties from entering
into the decision-making systems, on the other it also limited minority
investment choices. Moreover, majority shareholders, in order to make
smaller stockholding more stable and also to indirectly control the non-
speculative movements of shares on the stock market, had to pursue the
primary objective of making the return on the stock investment more
stable (at any rate, this is the objective that led to the creation and
affirmation of savings shares); the case of hedging done by companies
to protect shareholders from financial risks might then be considered
from this perspective. However, in the current environmental dynamic,
technological development, market integration, and globalization have
expanded the boundaries for choices, and broadened opportunities for
investment, and investors belonging to markets marked by concentrated
stockholding can thus also implement policies to diversify their own
portfolios.
If the shareholders’ interest is not the main determinant leading the
company to hedge against financial risks, the incentivizing factors are
62 A. Calvelli and C. Cannavale
linked to the possibility that suitable hedging policies and the choice of
appropriate hedging instruments can shelter the company from liquidity
crisis, and from a strict dependency on contingent factors, thus helping
it act with a long-term outlook, with positive effects on maintaining or
growing its economic value. This is particularly important in the
perspective of an environment subject to changes that not only cannot be
controlled, but often cannot be foreseen. On the other hand, the greater
environmental complexity has only increased the types of risks and their
intensity.
The multiple financial risks that companies operating internationally,
both outgoing and incoming, have to face may be summed up as follows
(Errunza and Losq 1987):
– Currency risks, related to volatile exchange rates and to the loss of
consumers’ purchasing power
– Political risks, including the risks of expropriation and
nationalization, which present an explicit barrier to capital flows
– Investment risks, correlated with the stage of development achieved
by the host country
Currency Risks
Currency risk, which is to say the risk connected with the variability of
exchange rates, produces three important effects for companies:
1. In the first place, an exchange variation impacts the debts owed to
and by companies in foreign currency. This risk, defined as
transaction risk, is manifested whenever companies grant or receive
deferments of payment by or from counterparties situated in
different countries. Of course, the risk exists only if the transaction
must be settled in a currency other than the home currency, and
yields its effects when calculating the countervalues in national
currency of debts owed or to be collected in foreign currency. In a
“direct or indirect” regime, it takes concrete form as follows: for the
importer, the possibility that a reduction in the exchange might
result in an increase in the euro countervalue of debts owed in
foreign currency; for the exporter (seller), the possibility that an
increase in the exchange might result in a decrease in the euro
countervalue of the debt owed to it in foreign currency. To the
contrary, in an “indirect or direct” regime, the importer fears the
increase in the exchange rate (a circumstance that would increase
the countervalue of the debt expressed in its own reporting
currency), and the exporter fears the decline in the exchange rate
(which would diminish the countervalue of the debt owed to it in
foreign currency).
2. The variation in the exchange rate also impacts the actual
countervalue of the financial statement items related to transactions
in foreign currency. In the time that passes between the entry and
the closure of the financial statements, the exchange might possibly
undergo variations such as to modify these entries’ relative weight.
There is debate in this regard as to the moment in time starting from
which exposure to risk begins; this moment would appear to
coincide with that in which the order is made (for the purchaser) and
the invoice issued (seller), again in currencies other than the home
currency. This form of currency risk is defined as translation risk.
3. Lastly, but of no less importance, the exchange variation may impact
the company’s competitive position in a given market, rendering the
investments it has already made less profitable, or its products less
attractive. This is more generally defined as economic risk.
The unifying aspect of the different types of exchange risk may be
identified by focusing attention on the fundamental effects connected
with exchange rate variation, and on the way in which these effects are
perceived as management goes forward (Stampacchia 1995). For the
author, there are essentially two elemental effects that exchange rate
variations can have on the “system” of flows and values in the reporting
currency of an international company: the countervalue effect,
representing the variation of the reporting currency’s value as a function
of the variation of the exchange; and the currency flows effect,
representing the varia-tions of the flows as a function of the
 The Role of Culture in Internationalization
modifications of the overall system of expediencies induced by exchange
rate variations.
Emerging from these concepts, and especially from the currency
flows effect, is the bond of influence that exists between exchange rate
fluctuations and the competitive position of companies, when
“unfavourable” variations are consolidated over time. Therefore, for
efficient governance of transaction risks, it would be appropriate for the
manager to seek, at the very moment in which credit or debt positions in
currency are taken on, or at a later time (prior, at any rate to the positions’
maturity), to effect the relative hedging, if not systematically, at least
from a selective perspective. There are many tools available to
companies to hedge against transaction risks, and they permit a broad
range of alternatives, which may be functional to the managers’ financial
knowledge and to the nature of the available information.
As for the instruments to hedge against currency risk, a distinction
between traditional and innovative is made. The traditional ones are
invoicing in reporting currency (generally invoicing is in the seller’s
currency, but the choice at any rate depends on the parties’ contractual
power); insurance (highly expensive, and often impracticable for
minimum amounts and country); and the establishment of defensive
clauses. The most-used defensive clauses are the currency basket (more
stable with respect to the individual currency due precisely to the
possibility that the revaluations of certain currencies and devaulations of
others might offset one another), the establishment of an exchange cap
to the exporter’s advantage (“direct or indirect” regime), the
establishment of an exchange floor to the buyer’s advantage (“indirect
or direct” regime), and the possibility of establishing an exemption, and
thus the possibility of using the established exchange up to a certain
threshold.
Price Risks
In addition to the risks specifically connected to internationalization,
consideration should be made, in the area of financial risks, of the
volatility of commodity prices, which directly or indirectly impacts
companies’ production costs and therefore their profit margins. High
63
volatility in the prices of certain raw materials, often originating from
countries with weak currencies, makes price risk management critical,
especially for those companies with considerable risk exposure due to a
greater incidence—out of the total of productive inputs—of the factors
imported from abroad. The lesser the level of corporate added value, and
the higher the replacement costs, the greater the exposure is. The
negative repercussions for corporate profitability may be manifested in
the form of increased production costs, reduced operating margin, and a
lower price competitiveness in comparison with competitors.
With regard to price risks, three types may again be discerned:
1. Transaction risk, linked to the possibility that an increase (decrease)
in the commodities’ quotations might force the buyer (seller) to pay
(collect) an amount greater (less) than that estimated.
2. Replacement risk, linked to the possibility that an increase in prices
might shift demand towards replacement products.
3. Economic/competitive risk, related to the possibility that the
increase (decrease) in prices might be to the disadvantage of a
company but not its competitors that purchased (sold) at more
affordable prices.
In this case as well, two categories of hedging instruments may be
discerned: real instruments and financial instruments.
As concerns real instruments, mention is to be made of agreements at
a fixed price (depending at all times on the parties’ contractual strength)
and of the use of the technique of speculative inventory (purchasing
when prices are lower). This policy, although fruitful, cannot always be
used by companies. In the first place, the possibility of using it depends
on there being adequate liquidity; in the second place, not all raw
materials and semi-finished products can be stocked and, at any rate,
stocking depends on having adequate warehouses. Lastly, this policy
exposes the company to capital expenditures and the risk of obsolescent
and decaying inventories.
Credit Risk, Country Risk, and System Risk
64 A. Calvelli and C. Cannavale
As already discussed, credit risk expresses the possibility that the
counterparty in a financial service might fail to meet its obligation by the
deadlines and under the conditions established by contract. The
assessment of exposure to credit risk includes essentially subjective
components, as well as certain parameters of reference for the
assessments, such as the time left before the contract expires, and the
expected variability of prices, the exchange rate, or interest rates.
The difficulties inherent to measuring credit risk, which grows to the
extent in which there are no frequent relationships of exchange with the
counterparties, result in entrusting to specialized operators, such as
ratings firms, the judgement as to the counterparties’ reliability. Often,
the assessments expressed by these agencies merely replicate the ratings
determined by competitors, thereby accentuating market turbulence; it
follows that an error that is made when competitors are “in the right”
may create damage greater than the benefits derived from an accurate
forecast, in the case in which the competition is “in the wrong” (Masera
1993).
Some financial instruments, such as derivatives, for example, in
providing a hedge against market risks, at the same time offer guarantees
to protect credit risk. In this way, two orders of benefits are produced: at
the microeconomic level, the intermediaries can, with lesser uncertainty,
adjust, to the “desired” levels, their exposures to the expected
fluctuations of financial variables; at the systemic level, financial
transactions that are made do not create new risks, but ensure these risks
are distributed more rationally among operators.
For credit risks too, coverage may be gained a priori, by transferring
the risk itself to third parties: SACE insures export credits (Ossola Law),
provided that the payment deferments granted by the exporter to its
debtor exceed a given time frame, equal to eighteen months. It is also
possible to protect oneself from credit risks with the known procedural
techniques established for documentary credits.
As concerns country risk, it bears noting that the repeated foreign
debt crises of the developing countries and the countries of Eastern
Europe, and financial integration and liberalization processes, have
accentuated the problems related to this risk.
Signs of increased country risk, such as longer delays in making
payment, tend to yield economic effects upon the value of the exposures,
even before any concrete manifestation of insolvency, through the
depreciation of the credit portfolio recorded on the basis of market
quotations (Carcascio 1995).
In comparison with counterparty risk, country risk involves
responsibilities that fall within the sphere of government and, moreover,
may be realized regardless of the insolvency of the individual
counterparty, when the authority’s will to repay foreign debt, public or
private, ceases. The level of country risk reins in enthusiasm for the
international diversification of portfolios, at times also with contained
levels of risk, in the consideration that any losses associated with it
(nationalizations, prohibition against expatriating capital and profits)
may be considerable in size (Solnik and MacLeavey 1991).
Doubts as to a country’s political and institutional continuity and the
variability of regulations, widespread delays in payments, ethnic
conflicts, and internal conflicts are all parameters taken as a reference in
evaluating a country’s rating. They serve as sentinels of the economic
effects that, in terms of probability, will impact the value of the
exposures with regard to that country.
Generally, there is a depreciation of the credits owed by countries at
risk; the debt-equity-swap mechanism takes place in fact through a
drastic reduction of the nominal value of the debts owed to operators in
industrialized countries by operators in developing countries.
In recent years, to face country risk, innovative financial instruments
have come into being, such as credit derivatives, created in the early
1990s; their purpose is to transfer to a counterparty the credit risk
connected with a specific underlying activity (a bond, a bank loan, or a
combination of these activities).
Credit derivatives consist of an agreement between two parties,
through which one party, upon payment of a single or periodic
commission, is hedged against the credit risk connected to the activity of
 The Role of Culture in Internationalization
reference; the hedge consists of the counterparty’s commitment to
perform a counter- service, should a specific “credit event” occur, such
as insolvency, bankruptcy of the debtor of the underlying activity, or a
worsening of its creditworthiness.
The counter-service may consist of a cash payment of an amount
predetermined in the agreement, a payment of an amount determined in
accordance with the procedural schemes established in the contract
(difference between the initial value of the activity of reference and that
following the occurrence of the event, pre-established percentage of the
credit’s recovery value), and the physical delivery of the activity of
reference, if this is available.
The most widespread form of credit derivative has been that of the
credit swap, in its two main forms: Default Risk Swap and Total Return
Swap, which have different structures for the payments established by
the agreement (Hart 1995).
Default Risk Swap entails, for the duration of the contract, the
periodic exchange between two counterparties of cash flows calculated
on a notional capital consisting of the value of the activity of reference:
the contracting party that transferred the credit risk (seller) pays to the
counterparty, at different agreed-upon dates, a cash flow obtained by
applying to the notional capital a rate that takes account of the credit risk
connected with the activity of reference (Libor + X basis points). The
contracting party that accepts the transfer of the risk (purchaser) pays the
counterparty a cash flow by applying to said notional capital a base rate
equivalent to the cost of the funds, increased by a spread (Libor + Y basis
points).
This payment structure, then, generates a differential cash flow that
in fact constitutes the periodic premium borne by the party transferring
the credit risk; the level of the premium depends on the size of the risk
related to the activity of reference. In the event of the country’s
insolvency, the seller receives, from the counterparty, repayment of the
debt owed to it.
There may also be the case in which the purchaser, generally a bank,
issues a bond with a yield equivalent to the country risk for the
65
underlying activity. This bond may be purchased by an institutional
investor (investment fund, insurance company) in turn interested in
increasing the country risk in order to raise the performance of its
portfolio, which takes on the burden, in the event of insolvency, of
repaying the debt to the seller.
The likelihood of loss by the party accepting the credit risk is a
function of the likelihood of the debtor’s insolvency, of the leverage
factor predetermined by the agency, and of the realizable recovery rate.
The statistical data furnished by the leading rating agencies and
regarding the elements listed earlier may be used to assess the
operation’s riskiness.
The Total Return Swap is another possible credit swap structure. In
it, the parties, during the contract’s lifetime, exchange, in addition to the
periodic commission, any revaluations or devaluations of the underlying
activity. This means that the periodic cash flows generated by the
agreement are not always and exclusively borne by the party transferring
the credit risk: the direction and amount of the cash flows also depend
on the variations that the value of the activity of reference undergoes
between two payment deadlines.
It is clear, then, that one of the crucial elements in the agreement is
certainly the determination of the mechanism for assessing the activity
underlying the credit swap. If it is a bond that is traded on the market, its
market quote can then be used; otherwise, one of the theoretical models
developed for this purpose must be employed.
Given the relative complexity characterizing the two types of credit
swap illustrated earlier in the text, it is appropriate, upon concluding the
agreement, to pay particular attention to the definition of all the
contractual elements and, in particular the key terms, such as those
connected to the credit event (insolvency, bankruptcy, etc.) and to the
consequent structure of the payments. The purpose of this is to avoid
objections or defaults based on unclear elements of the contract. The
International Swap Dealer Association (ISDA) is also moving in this
direction, as it is seeking to formulate a standardized clause able to
univocally define the contract terms.
66 A. Calvelli and C. Cannavale
Going on now to analysing the possible concrete uses of these
instruments, it must be stressed that their characteristics make them
particularly attractive for banking enterprises and, more generally, for
financial intermediaries, which, following their activities, have always
been exposed to credit risk.
Thanks to the use of credit derivatives and of credit swaps in
particular, banks can treat credit risk separately from the granted loan,
thus achieving greater flexibility in implementing their credit risk
management programmes.
Of the most recent players in the credit derivatives market, mention
must also be made of industrial and commercial enterprises, at least the
larger ones.
Hedging Policies and Derivative Instruments
Derivative instruments are contracts whose value depends on the trend
in the underlying activity. Here, attention will focus on three types of
derivative instruments: futures, options, and swaps. The three
instruments may have financial activities, currency, or commodities as
their underlying activity, and can be used in accordance with more or
less speculative perspectives depending on the specific interests pursued
by the party signing the contract.
Attention here will focus on derivatives regarding currency (currency
options, currency futures, and currency swaps), commodities
(commodity options and commodity future), and interest rates (interest
rate swap). The logic that is followed will be that of the subscriber
(company) using derivatives as hedging instruments, while having at all
times to consider, in order to make an appropriate choice of instrument,
the speculative potential of each. Moreover, we shall dwell exclusively
on the instruments for hedging against exchange risk, typical of
companies purchasing and selling from non-EU countries.
The simplest derivative instruments are forward contracts, which
involve purchasing or selling a certain quantity of underlying activity at
a pre-established maturity, and at a pre-established price (forward price).
These instruments lock in the price or exchange risk associated with a
given transaction, because the subscriber signs a contract today in which
the elements are established and cannot be modified. It is an over-the-
counter instrument, whose features are negotiated between the company
and the financial operator.
However, precisely the fact that prices (or exchanges rates) are fixed,
and that, therefore, the subscriber has had no opportunity to take
advantage of their favourable variations, leads companies to use other
derivative instruments that are more complex and often characterized by
higher levels of risk.
Currency Futures
The futures contract is a bilateral agreement in which one of the parties
undertakes to buy or sell a certain fixed quantity of a commodity
(commodity future) or of a financial activity (financial future) against a
given payment in money, at a certain future date. It is a standardized
instrument contracted in a market of its own (futures market). The
standardization lies in the fact that the future’s base elements (quotation,
denomination, mechanism of operation) are pre-established by the
Clearing House, the body that serves as a counterparty for all those
operating in futures.
These instruments make it possible to take on purchase or sale
positions in an activity without being required to have, at the moment of
bargaining, the resources needed to meet the assumed obligation. The
positions that may be taken are–short, equalling a sale of the underlying
activities; and – long, equalling a purchase of the underlying activities.
In addition to quality, type, and price of the commodity or of the
financial activity that is the object of trading and the date on which the
exchange will take place, the futures contract also includes the place of
trading and the possible choices available to the seller for the delivery
procedure. The elements of the future are as follows:
Position: Long = commitment to purchase; Short = commitment to sell.
• Denomination: fixed for each type of future and underlying activity,
indicates the standardized quantity of underlying activity represented
by a contract.
• Number of futures to be purchased; depends on the ratio between the
capital to be invested and the denomination.
 The Role of Culture in Internationalization
• The quotation, to be monitored daily, is the forward price of the
underlying activity in the futures market.
• Nominal value = number of futures for the Denomination.
• Face value = countervalue of the nominal value.
• MI (initial margin) = percentage of VF that operators pay at the
moment of signing in order to open the margin account.
• MV (margin of variation) = VF1−Vfo
• Margin call = 75% of the initial margin (MI)
The function of futures revolves around the “marking to the market”
mechanism: every day, the subscribers’ positions are crossed (pure
accounting operation) with opposite positions in order to verify any
crediting or debiting of the margin of variation.
Example: Subscription (purchase) of a future, long × short position
1. Purchase (long position) at start of day underlying the start-of-day
quotation
2. End-of-day offset with sale (short position) of underlying activity of
quotation existing at end of day
3. the next day, the initial long position is reopened at the previous end-
of- day quotation and returns to points 1 and 2 until the future’s
maturity or until the process is interrupted at the will of the operator
that subscribed the future, or in the cases in which the operator
cannot compensate the margin account.
The objective of those subscribing the future is in fact to earn
financial income (margins of variation) and, where applicable, to use it
to offset the losses suffered in the real market (commodities) or the
currency market (currencies). If the operator initially took a long
position, it is offset daily with a short position if the face value increases,
and the margin account is credited if the VF increases, and charged if it
diminishes. To the contrary, if an operator has initially taken a short
position, this is offset with a long position and the margin account is
credited if the VF decreases, and is charged if the VF increases.
67
Based on this mechanism, operators speculating on VF increases will
take long positions (to offset short); those speculating on VF decreases
will take short positions (to offset long). Specific interest accrues on the
sums credited and debited. Should the balance of the margin account fall
below 75% of the initial value, the counterparty is required to call the
margin, which is to say to bring the margin account’s balance in line with
the initial margin value. If the operator does not do so, the Clearing
House closes the account, compensating the future with a position
opposed to the initial one.
Example: dollar/euro currency future
In the currency future, the underlying activity is the foreign currency,
and therefore
– the denomination is the standardized quantity of foreign currency
drawn from the future (e.g. $100) and
– the quotation is the forward price of the foreign currency.
To simplify bargaining, only the case of a quotation expressed as the
forward exchange in force on the European Monetary Union (EMU)
market is hypothesized
(e.g. 1 euro = 1, … $ and therefore expressed as 1, … $)
In this way, it will be easy to identify the variation of the quotation
and of the face value on which the operator wagers.
Let us consider an example:
Suppose that an Italian exporter is owed a $50,000 debt by US
customers, and wishes to cover itself with a future having the following
characteristics:
T = $10,000
Q = $1.27
The exporter fears an increase in the euro/dollar exchange; given that
the quotation is expressed as the exchange (N.B. the euro is quoted as
“direct or indirect”), the exporter wagers precisely on the increase in Q.
68 A. Calvelli and C. Cannavale
We may calculate the number of futures so yielded as 50,000/10,000 =
5.
The exporter thus subscribes five contracts.
Let us use the proportion to calculate VF.
€1:$1.27=VF:VN.
Therefore, VF = 50,000 × 1/1.27.
Even without doing the calculation, it may easily be noted that the
increase in the quotation would entail a decrease of the VF and, therefore,
with these data, the exporter may be covered by taking a short position
to offset the long.
In subsequent days, the MV is credited or debited depending on
whether the quotation actually increases (decreases of VF) or decreases.
The calculation of VF is at any rate important for calculating the
initial margin and margin call.
Currency Options
Options are contracts with which the right (not obligation) is taken on to
purchase (call) or sell (put) a certain quantity of underlying activity
(currency or commodities) at a pre-established price or by a pre-
established deadline.
Options are defined as European if they may be exercised only at
maturity, and as American if they may be exercised until maturity. There
are standardized over-the-counter options, but the operating mechanism
is the same.
The elements of the option are as follows:
• Strike price (X). This is the pre-established (forward) price at which
the subscriber of the call (put) may buy (sell) the underlying activity;
• Premium (Vo), which is the price at which the subscriber may
subscribe the option and is always owed by the operator when the
contract is signed. It expresses the value of the option.
Options are referred to as “in the money” if, at the time of
subscription, the strike price is lower than the market price. They are
referred to as “at the money” if the strike price and market price are the
same. Lastly, they are defined as “out of the money” if, at the time of
subscription, the strike price is lower than the market price.
In the case of the CURRENCY OPTION, the underlying activity is a
foreign currency, and to make calculations of benefit in euros and,
therefore, to understand the countervalue in euros of the operations, it is
necessary to convert the strike price (which is in practical terms a
forward exchange) into euros, and to calculate the countervalue in euros
of the spot exchange expected for maturity and of the exchange at
maturity.
X = 1/SP, where SP is the strike price
St* = 1/Cpa, where Cpa is the spot exchange expected by the operator
for maturity
St = 1/Cps, where Cps is the spot exchange at maturity
CURRENCY OPTION CALL (importer’s hedge):
St∗ − −X Vo > 0
The operator subscribes the call because, according to its
expectations, the option will allow it to purchase the foreign currency at
a more beneficial exchange (SP>Cpa), and thus to save on the
countervalue in euros.
St − >X 0
The operator removes the premium because the SP is effectively
greater than the spot exchange at maturity, and therefore saves on the
purchase of foreign currency.
 The Role of Culture in Internationalization
St − −X Vo > 0
The operator has gained an advantage because it has saved, on the
purchase of the foreign currency, an amount greater than the premium it
paid.
CURRENCY OPTION PUT (exporter’s hedge)
X− − >St∗Vo 0
The operator subscribes the PUT because, according to its
expectations, the option will allow it to exchange the foreign currency in
euros (sell currency) at a more beneficial exchange than the market one
(SP < Cpa)
X− >St 0 The exporter, on the other hand, will verify the benefit of making a
The operator removes the premium and sells the currency at the strike
price (SP < Cps)
X− −St Vo > 0
The operator has gained an advantage because, with the option, it
obtained a remuneration in excess of the premium paid.
Currency Swaps
These are contracts signed between two parties, through which each
party takes on the obligation to make fixed or variable periodic
payments. They serve mainly to hedge against interest risk since they
make it possible to transform the cost of financing from fixed to variable
or the other way around, or to obtain savings on the payment of financial
69
charges by exchanging the rate obtained from one’s own credit
institution with that received by the counterparty from another credit
institution.
They may also serve to hedge against exchange risk.
To hedge against exchange risk, improper use may be made of a
currency swap. This entails commitment to a pair of opposing operations
on the same notional capital (foreign currency).
In the currency swap, the elements are all known, so operators can
make a calculation in advance in order to verify the benefit of the
operation.
With a view to hedging, operators may plausibly choose, as a forward
operation, the one that serves as a hedge. The importer will then verify
the benefit of making a spot sale and a forward purchase of foreign
currency. In this way, it will have, at maturity, the currency it needs to
pay foreign suppliers.
spot purchase against a forward sale of foreign currency (sale of foreign
currency received from the foreign supplier).
Example 1: Spot sale of dollars and forward purchase of dollars
(importer’s hedge).
Supposing that the underlying activity is $1, the importer will make
the following calculation of benefit, and will make the swap only if the
result (R) is greater than zero.
R = 1 − 1 +Interest on euros − Interest on dollarsconverted into euros
Cp Ct
R= 1 − 1 +Ie − I$
Cp Ct Ct
– Where 1/Cp is the countervalue in euros of $1 calculated at the
exchange Cp.
– It expresses the countervalue the importer obtains from the spot sale
of $1.
– 1/Ct is the countervalue in euros that the importer pays for the
forward purchase of $1.
70 A. Calvelli and C. Cannavale
– Ie is the interest in euros that the importer earns by investing, for the
duration of the swap, the euros obtained from the spot sale of 1
dollar.
– I$ /Ct is the countervalue in euros of the interest in dollar that the
operator renounces due to having spot-sold the dollar.
From the calculation, it may easily be understood that the operation’s
benefit depends greatly on the differential between interests, and
therefore on the interest rate differential.
Example 2: Spot purchase of dollars and forward sale of dollars
(exporter’s hedge).
Example for $1 negotiated.
−1 1 I$
R= + − +Ie , FedEx, which shifted fuel price increases onto the final customers in the
Cp Cp Ct
If R > 0, it is beneficial to perform the operation.
In this case as well, the benefit depends greatly on the interest rate
differential. In fact, the swap is an improper hedging instrument: to be
covered, it is enough to make a forward contract for the forward sale of
currency (exporter) or for the forward purchase of currency (importer).
Operators choose the currency swap instead of forward precisely to
speculate on the interest rate differential.
Price Risk Hedging and Value Creation: Some Evidence from Jet
Fuel
Rising oil prices have led many airlines to hedge prices, considering that,
according to estimates by the International Air Transport Association
(IATA), fuel is these companies’ second largest cost item. Lin and Chang
(2009), in a sample of 69 airlines in 32 countries during the period from
1995 to 2005, examined the sources of the hedge premium for jet fuel.
These companies are subject to significant risk due to volatility, which
allows the sources of added value derived from fuel hedging to be
investigated by using the data from global airlines.
The results of the study show that jet fuel price hedging increases the
value of airlines throughout the world. In particular, airlines residing in
the United States that practise fuel hedging increase their value, while
airlines that do not reside in the United States contribute no added value
to their enterprises.
Like other industry operators, airlines protect themselves from fuel
price risk through hedging. This is a relatively recent practice: before
1985, airlines did not hedge fuel risk, although they were already
practicing currency hedging. Even today, some airlines are not hedging
this risk with financial instruments, but simply pass price increases along
to the final customers: this is the case, for example, with Lufthansa and
cargo sector (Morrell and Swan 2006). However, this solution is difficult
to put into practice in passenger transport, given the strong industry
competition.
Airlines have the possibility of trading various types of financial
instruments useful for hedging both jet fuel and oil. Jet fuel can only be
traded OTC (over-the-counter—i.e. outside the regulated markets, with
no clearing house), and its liquidity is certainly lower than oil, which can
be traded on the regulated markets NYMEX (United States) and IPE
(Europe). Generally, contracts do not exceed 12 months, with 80% of
contracts not exceeding three. Various types of contracts are used:
forward contracts, futures contracts, and derivatives like options, collars,
and swap.
Forward contracts are not traded on regulated markets, but directly
among counterparties (OTC), which spot fix price and quality of the
underlying asset. There is counterparty risk, given the possibility of one
of these ending up bankrupt prior to the contract’s expiration. The
 The Role of Culture in Internationalization
airlines’ fuel suppliers, like AirBP, use forward contracts, which are less
convenient for speculators (Morrell and Swan 2006).
Futures contracts, on the other hand, are designed both to hedge fuel
risk and to provide protection from counterparty risk. The supplier
accepts shipping the counterparty a given amount of the underlying asset
(in this case, oil) at a given price (the “strike price”) on a given future
date. In general, the position is in almost all cases reversed upon the
contract’s expiry, in order to avoid the physical delivery of the
underlying asset. According to NYMEX, fewer than 1% of contracts end
with the physical shipment of the underlying asset.
Oil futures are traded on two leading regulated markets: NYMEX
(New York) and IPE (London). Each futures contract that is signed
corresponds to 1000 barrels of petroleum (West Texas Intermediate or
Brent Crude Oil). These may be signed every month, up to two years in
advance and with a duration of up to three years.
Often, companies in the sector rely on options as well. When
exercising the option, the purchaser is in a position analogous to that of
futures.
Call options allow price increase risk to be hedged simply by paying the
premium, without requiring an operating margin. This financial
instrument can therefore also be used in the event of economic
difficulties which, of course, would not permit the purchase of margin
instruments.
Jet fuel options are rarely traded, and are OTC. Therefore, there is the
risk of both counterparties—a risk from which it is necessary to protect
oneself further. On the other hand, Brent gas oil and crude oil options are
available, which may be traded on the IPE regulated market.
Lately, airlines have tried a special combination of call and put
options, defined as “collar.” A call option is purchased for protection
against price increases, and at the same time a put option is purchased to
protect also against the risk of the market going in the opposite direction.
The premium of the call option will be greater than the put option,
and therefore where the call is exercised, the profit lies in the difference
between what is collected by exercising the call option and the lost
71
premium on the put option. If the market trends in the reverse, the put
option is exercised, in which the earnings will partially hedge the loss
paid on the call.
Another financial instrument that can be used is that of swaps. Swaps
are customized futures contracts through which airlines lock in the fuel
price. The airline purchases a swap at a given strike price for a given
quantity of jet fuel per month. The current price is compared every month
with the strike price, and where it is higher, the airline receives the added
value in comparison with the strike and, conversely, will pay the
counterparty the loss on the strike where the price is lower that month.
Turner and Lim (2015) examined four commodities (West Texas
Intermediate (WTI), Brent, heating oil, diesel fuel) typically used by
airlines to cross-hedge jet fuel.
Airlines have had conflicting results with hedging, and the general
feeling on the part of both airline executives and scholars is insecurity
regarding the procedures for hedging their own positions on fuel. While
some articles have suggested that, due to the shortcomings of an ordinary
least squares (OLS), a more advanced model should be used, this study
does not draw the same conclusions. Other models, such as ECM and the
generalized autoregressive conditional heteroskedasticity (GARCH),
generate hedge ratios similar to OLS.
After the simulations, the results by Turner and Lim (2015)
demonstrate that no model clearly and consistently generates a hedge
ratio better than the other models. This study shows that airline cross
hedges created with futures should use oil as the base product.
Since fuel oil is a refined petroleum product, its price comes close to
other fuels. Moreover, with a daily hedge horizon, diesel fuel is inferior
to the other three petroleum products, and is less effective for hedging
the fuels, regardless of the moment of the contract’s expiration, but its
performance improves with a weekly hedge horizon. Moreover, airlines
that hedge futures would create the most effective hedge by using
contracts expiring at three months for fuel oil, but the hedge’s
effectiveness diminishes as the time to reach the contractual expiration
increases.
72 A. Calvelli and C. Cannavale
However, based on the in-sample analyses and the results of the
Monte Carlo simulation, also with fuel oil, the hedge’s performance is
67% lower for the hedge’s effectiveness. Performance improves up to
about 71% with a weekly hedge horizon. The results reached by Turner
& Lim (2015) might therefore be sensitive to the hedge horizon.
To have a more holistic view of the hedge’s performance and of the
model’s use, the hedge’s duration should be carefully examined in future
research to associate the frequency of the data with the planned hedge
horizon.
An interesting example is that of Delta Airlines (Carter et al. 2006),
which maintained high hedge percentages. In particular, at the end of
2002, the company had hedged approximately 65% of its fuel
requirement for 2003 but increased its exposure during the period after
the 9/11 attacks, believing that the industry crisis would be a short one.
At the end of 2003, Delta’s long-term debt reached 48% of total assets,
against the 27% recorded in 2000, with approximately $1 billion coming
due in 2004. During the 2001–2003 period, Delta posted operating losses
for nearly $3 billion, even as it made interest payments for $1.9 billion.
In February 2004, Delta liquidated the hedge contracts existing on jet
fuel to collect $83 million in cash, leaving the airline totally exposed to
future price shocks.
The positive link between hedging and value creation is confirmed
by the fact that for European airlines, growth in EBIT (earnings before
interest and taxes) bears a significant negative correlation with
systematic risk (Lee and Hooy 2012). This means that when EBIT grows,
the value of β must fall.
6. The Role of Culture in Internationalization
The Key Role of Cultural Competence
In addition to the growing degree of internationalization of companies,
globalization also brings with it a trend towards an increasingly high
mobility of human resources, factors that make companies—regardless
of size, and with intensities differing by sector—multicultural
environments, in which people from different countries meet and work
together. These people reflect different working cultures. They are
inspired by different values, filter their actions through different beliefs,
and need to create multicultural teams, finding a way to help people work
well together.
Moreover, globalization provides the opportunity to sell worldwide
and to expand activities based on the specific advantages of position. But
while geographic distances grow smaller, psychological distance
survives, and consumers sometimes perceive multinationals as an
expression of cultures they do not like, or of countries they see as
overassertive and dominating. This implies the need for companies to
work on their customers’ perception, seeking to adapt their products, and
at times their image, to specific contexts.
Any type of international relationship requires cultural adaptation:
different values meet, and companies must find a balance between their
culture of origin and the one that hosts them. Globalization cannot be
understood as standardization. Even Coca-Cola, Starbucks, and
McDonald’s, considered emblems of globalization, have abandoned the
hypothesis of thinking globally and acting globally, seeking to strike the
right balance between the need to preserve their own image and
corporate philosophy on the one hand, and, on the other, to adapt to
different markets in order to seize the opportunities they offer.
In this balancing process, managers play a key role because they
operate as an interface between markets and the corporation. Expatriates
in particular must learn the rules of the host market, comprehend how
cultural diversity impacts the company’s ability to successfully operate
in the specific market, and share their knowledge with the corporation in
order to activate a virtuous process of organizational learning.
The success of an internationalization strategy is strongly
conditioned by the managers’ learning capacity—a capacity impacted by
the managers’ knowledge base, their propensity to acquire new
knowledge, and an organizational climate that positively assesses the
ability to deal with and integrate the new. Through adaptation processes,
expatriates learn the culture of the various settings, and develop the
 The Role of Culture in Internationalization
ability to value diversity in order to optimize relationships (Mendenhall
et al. 2002; Stroh and Caligiuri 1998).
With respect to culture and the role of cultural diversity, Boisot
(1998) in his book on Knowledge Management, defines cultural
knowledge as the managers’ awareness of the existence and value of
cultural differences. Cultural knowledge is the cognitive basis of the
process but is not on its own enough to guarantee companies success on
international markets: managers not only have to be aware of the value
of diversity, but they must also be able to exploit this awareness to
achieve profitable results. It is in this perspective that the concept is
introduced of cultural competence (Calvelli and Cannavale 2013),
understood as managers’ ability to make efficient use of cultural
knowledge, which is to say the ability to recognize, acquire, and combine
cultural knowledge in the most profitable way possible. Cultural
competence impacts the propensity of individuals to share knowledge
and to recognize and assess key information (Magala 2005), and may
also be defined as the ability to recognize and combine diversity by
emphasizing the positive impact it has on the managers’ willingness to
open to diversity and accept the ideas and knowledge of others (Stier
2006).
In more recent years, managers of multinationals have also been
recognizing the key role of cultural competence for companies’
competitive success. The results of the research done by Uber Grosse
(2011), which analysed the importance, as perceived by international
managers, of possessing cultural competence, show that the interviewed
managers are, above all, aware of the negative consequences that may
derive from cultural incompetence; in the second place, again according
to the interviewees’ perceptions, cultural competence significantly
impacts the running of the business, aptitudes, communication with
overseas partners, and regulations.
The concept of cultural competence is not a new one. Many authors,
in fact, albeit using different terminologies, deal with the issue. Stone
(2006) speaks of intercultural effectiveness and Heyward (2002) of
intercultural literacy, while Deardorff (2006) introduces the term
73
“intercultural competence.” Hunter et al. (2006) define “global
competence” as “having an open mind, while actively seeking to
understand the cultural norms and the expectations of others, exploiting
this acquired knowledge to interact, communicate, and work effectively
outside one’s own environment” (Hunter et al. 2006, p. 270).
With reference to the multitude of definitions that often evoke
similar—but not equal—concepts, Deardorff (2006) maintains that the
lack of specificity in the definition of intercultural competence is due to
the difficulty of identifying the specific components of this concept. The
author offers a broad understanding of intercultural competence,
defining it as “the ability to communicate effectively and adequately in
intercultural situations thanks to the possession of one’s own
intercultural knowledge, skills, and aptitudes” (Deardorff 2006, p. 247).
Stone (2006) comes closest to the RBV concept of competence, stating
that “intercultural effectiveness” is “the ability to interact with people of
different cultures in order to optimize the likelihood of mutually
successful results”(Stone 2006, p. 338).
Within the context of cross-cultural management studies, one of the
first contributions on the issue is offered by Adler and Bartholomew
(1992, p. 53), who define the competence of the global manager as the
ability to learn the perspectives and practices of different cultures, to be
able to work simultaneously with people from diverse cultural contexts,
to adapt to cultures distant from one’s own, and to be capable of
interacting with colleagues from different backgrounds.
In a manner not unlike Adler and Bartholomew, Black and
Mendenhall (1990) and Hofstede (2001) focus their attention on
intercultural communication and define cultural competence as the
ability to communicate and interact with people from different contexts.
Summarizing the authors’ perspectives, Johnson et al. 2006 seek to
offer a definition that takes account of the various aspects mentioned and
define cultural competence as the ability to operate effectively in cultural
settings different from one’s own. According to the authors, this ability
is the result of three interdependent factors: the managers’ personality,
which must be open to innovation and dialogue; the cognitive dimension,
74 A. Calvelli and C. Cannavale
understood as how individuals learn and categorize diversity; and the
behavioural dimension, related to the way in which people communicate
with others. Communicative skills and the cognitive sphere may be
developed through suitable training processes; the personal dimension,
on the other hand, is the result of the individuals’ personality, their
individual culture, and the socialization processes they experience in
their lifetimes. Acting upon all three factors is the organizational
dimension: a culture that values the impetus towards change and fosters
the acceptance of diversity is undoubtedly a necessary support for
implementing cultural competence which, lacking this, remains an
individual ability, of little use for building a competitive edge (Calza et
al. 2013).
The need to develop adequate cultural competence becomes even
more important the greater the distance between the home and host
culture is. Although potentially advantageous in terms of knowledge
enrichment, predisposition to accepting diversity, and the acquisition of
knowledge about different planning and problem-solving systems,
cultural distance raises the risk that the workers and customers on the
foreign market might be closed to the company’s products and
knowledge.
It is often found that in settings characterized by a high degree of
refusal to accept cultural diversities, closure may be caused by fear of
losing one’s own identity. This may be managed through categorization
processes that lead to accepting the similar and refusing the different,
assessed simplistically on the basis of such visible factors as skin colour,
language, religion, and so on. In these settings above all, the company
must learn to take root, to adopt behaviour respectful of the setting’s
social norms, that allows potential interlocutors—be they customers,
workers, or other stakeholders—to perceive a smaller distance between
their own culture and that of the foreign company.
Cultural distance, understood as the difference between cultural
values characterizing the partners’ national culture, conditions the
processes of knowledge transfer and knowledge sharing within the new
organization, and offers important inputs to organizational change.
Inter-organizational relationships, whether competitive or
collaborative, offer companies the possibility to augment their
knowledge base and increase the use of the resources they possess (Hitt
et al. 2000). Indeed, ability to explore appears to be one of the leading
sources of competitive advantage for companies that require an ongoing
review of accumulated knowledge in order to remain on the frontier of
innovation at all times.
Entry into culturally distinct markets requires companies to be able
to develop policies capable of dealing with market conditions that are
often quite different from those in the country of origin. In so doing, it
identifies international strategic alliances as the ideal way to augment
and increase the competence possessed by combining the company’s
assets and knowledge with the partners’ base of accumulated knowledge
(Koza and Lewin 2000).
Alliances are a source of opportunity both for the partner
implementing the internationalization strategy and for the local partner:
for the former, diversity and the foreign partner’s intensity of learning
facilitate the acquisition of local knowledge and strengthen the
company’s performance in the host country (Luo and Peng 1999;
Makino and Delios 1996); for the latter, learning from the partner
company contributes an important road for developing managerial,
organizational, and technological knowledge, and in that sense creates
opportunities for better performance and greater likelihood of survival
(Fahy et al. 2000; Lyles and Salk 1996).
Stable cooperation eases the processes of transfer of tangible and
intangible resources (Jarillo 1988; Walker and Poppo 1991; Alston and
Gillespie 1989; Beamish 1988; Contractor and Lorange 1988), but the
concrete sharing of knowledge (Morrison and Mezentseff 1997) is
possible only if the partners construct a background suitable for learning,
laying the foundations for establishing a learning alliance (Senge 1992).
This background is based on a clear legitimization of the purposes of the
alliance, on the transparency of these purposes, and on the ability to build
relationships based on trust rather than on opportunism. These are not
simple factors; to the contrary, trust is impacted by the partners’ cultural
 The Role of Culture in Internationalization
compatibility which, in turn, depends on the perception they have of the
distance existing between their cultures (Calza and Cannavale 2014), and
on their ability to learn the partner’s culture, while recognizing the value
of diversity (Stier 2009).
International collaborations are, in fact, characterized by a high rate
of dissolution (Hennart et al. 1998), which often results from low
complementariness among the partners (Park and Ungson 1997) and
from their opportunistic behaviour (Porter and Fuller 1985; Hamel 1991;
Park and Russo 1996).
A study by Koza and Lewin (2000) on international strategic
alliances shows, indeed, that managers recognize as main causes of a
lliances’ failure the following factors: the lack of trust and of effective
cooperation among partners, negotiations that are excessively regulated
a priori, the little attention these managers pay to the emergence of
problems within the alliance, cultural misunderstandings, bad strategic
planning, and a careless selection of partners.
Ideally, both partners in a collaboration must learn as much as
possible from one another, in a relationship in which new values and new
norms can be created by joint needs (Parkhe 1991). A shared culture, in
fact, attainable by objectifying the success derived from using skills,
reinforces cohesion, improves communication and, in the degree to
which it approves an organization’s ability to act as a unit, makes it
possible to best express the new company’s distinctive skills by
triggering a virtuous circle that involves the following phases: exercise
of distinctive competence, the collective experience of success,
idealization, stabilization of values and of the symbolic field, cohesion,
and organizational efficiency (Gagliardi 1995).
All the authors analyse the concept of inter-culturality and, therefore,
the ability of individuals to comprehend the phenomenon, in response to
globalization and internationalization. The objective of the analysis is to
identify the capacities to be developed and the methodologies to be used,
and therefore most are linked to the themes of the learning and training
of human resources. Although originating from distant fields, these
sociological and psychographic analyses can be highly useful to
75
companies that are preparing their expatriates; their objective is to draw
the greatest possible contribution of knowledge from international
assignments and, subsequently, from their repatriation.
In fact, in a broader social perspective, the cultural differences within
a community characterized by the presence of different cultures may give
rise to misunderstandings or errors in communication (Stier 2006),
conflicts, and anxiety (Jiang 2006). To avoid these problems, it is
necessary to be actively involved not only in understanding diversity but
also in negotiating between different cultural orientations, and in
managing the differences in such a way as to foster a harmonious
development of the community itself (Heyward 2002; Stier 2006). This
is what takes place in modern companies, characterized by the presence
of diversity within, and highly oriented towards internationalization.
Management must be able to understand and handle diversity, and this
process requires a planned activity of negotiation—or better,
mediation—between the different beliefs and values that are manifested
within the company.
But Why Is the Context’s Culture So Important?
The introduction of a new market, whether one of procurement or outlet,
implies the need to work within a different cultural context: different
rules, different behaviour, and different social norms can make
coordination difficult, and may have a significant impact on the
company’s communication and image (Gehrke and Claes 2014; House
et al. 2004; Morosini et al. 1998; Weber et al. 1996; Altman and Baruch
1998; Melin 1992; Adler 1986).
In extreme summary, leaving behind the positivistic approach of the
models based on cultural dimensions, three fundamental aspects of
culture may be pointed out, and the important implications they have at
the company level may be considered.
The first aspect is hierarchy: while in certain contexts, the hierarchy
is rigid and essential for guarantee the registration of activities, in others,
the hierarchy is more flexible: people accept the leader, but they do not
feel overseen, or inferior.
76 A. Calvelli and C. Cannavale
In these settings, hierarchy is connected with the working
environment and has no impact on the social relationship. To the
contrary, in the former, hierarchy also influences social life. Hierarchy
has its foundation in the essential assumptions that crystallize over
history, influence the country’s educational system, and are handed
down through social institutions, first of all the family. The Confucian
ethic, based on the five hierarchical relationships, is an important
example of this, but similar conditionings that individuals submit to in
order to respect inequalities and positions of subordination derive from
certain Western religions like Catholicism or even Islam, which educate
individuals to have unconditioned respect for God’s will, thus inducing
a sort of fatalism and, therefore, a low orientation towards action and
proactiveness.
At the company level, the sense of hierarchy impacts the way in
which decisions are made, the management of communication processes,
and
The Role of Culture in Internationalization
the accountability of individuals who do not hold positions of importance
inside the organization. A strong sense of hierarchy will result in a
prevalence of top-down communication, of centralized decision-making,
and of limited accountability and proactiveness among employees who
will be used more to obeying—or at any rate to carrying out directives—
than to contributing to decision-making and expressing their ideas.
Another fundamental aspect, linked to the context’s culture and
therefore to the values prevailing within it, thus conditioning the actions
and behaviour of individuals, is represented by the individuals’
inclination to see themselves as part of a group, or as independent. This
inclination, commonly known as the tendency to collectivism in the
former case and to individualism in the latter, has many implications for
company activities.
In collectivist cultures, people are educated to place the group’s
interests before the individual’s, to sacrifice themselves for the collective
good. Group harmony is very important, and individuals explore the
group’s consensus before expressing their own ideas on changes or
innovations, thus slowing the process of generating new ideas. Harmony
leads people to remain for a long time in the same group, employee
turnover is limited, the sense of belonging is strong, and the group’s
decision is always accepted. People are inclined to teamwork and make
an effort to achieve the expected results so as not to discredit the team.
Personal commitment and emotional involvement have a dual origin: the
individual does not wish to fail, because he or she fears the group’s
judgement, but also because failing would draw attention to the group’s
error in placing excessive hopes in his or her ability to complete the task.
In Asian cultures, Confucian in particular, this tendency becomes very
strong, and is connected to the principle of saving face, in both its active
and passive sense. They refer to the team for any problem, and also for
solving problems.
To the contrary, in individualistic culture, people are educated to
respect the needs and feelings of individuals. The starting point for
ethical, social, and work-related decisions is the individual, and the
protection of individual rights takes on a central role. This results in
greater speed in generating new ideas, which, however, may be slowed
in the implementation phase due to the lack of planning, and to
competition between individuals. People try to solve problems
independently, and wish to show their personal values. Competition
within the team is accepted as natural. The team is temporary; it is a way
of working, not an idea for living, and teams generally exist so long as
people are achieving goals. The negative aspect of individualism is a
certain tendency towards opportunism.
In summary, individualism and collectivism influence the philosophy
of work and problem solving, but they also have interesting effects on
openness to change and innovations.
The third fundamental aspect explored by the various authors that
have made important contributions on the subject is the impact of
national culture on people’s inclination to accept change and innovation.
The acceptance of change and innovation is strongly influenced by the
trend, in some cultures, to preserve traditions, value the past, and feel
threatened by the new. This aspect of culture has major implications for
 The Role of Culture in Internationalization
companies. Above all, openness to innovation is linked to technological
innovation, but also to any other type of innovation: organizational,
strategic, and market innovation. Some cultures are more inclined to
consider these changes as something precious, to feel stimulated by
them, while others consider the changes too risky and prefer to keep on
doing things as in the past.
When innovation is welcomed, the development of new products or
investment in faraway countries will be considered a possible source of
profitability, and an interesting challenge. Conversely, when people fear
change, innovation will be far more incremental and connected to
processes more than products; internationalization will be more gradual,
with a preference for similar countries.
Openness to change also has an impact on the organization. If people
wish to preserve traditions, they will tend to accept employees similar to
previous ones. Cultural diversity will be minimum, and some gender
disparities might exist within the organization. Proximity to diversity can
be reinforced by collectivism, creating a sort of clan within the
organization.
In summary, people’s inclination to accept change has an impact on
innovation and on openness to diversities. From the standpoint of
consumers, it also has an impact on their inclination to try new products
and to change habits; consequently, it has an impact on the consumers’
behaviour.
As the overcoming of the ethnocentric hypothesis has shown,
diversity cannot be ignored, but the need to preserve unitariness and
efficiency, on the other hand, imposes the need not to adapt completely,
and to avoid a polycentric approach that would easily lead to the
disconnection of the corporate system. Only through a planned
adaptation, what the English- speaking world calls “acculturation” and
“adjustment,” can balance be preserved. The manager’s skill, then,
becomes that of understanding what diversity to value, and what values
can, instead, be downsized or adjusted with respect to the home culture.
It is an ability that, like all distinctive skills, is self-nourishing. It is linked
to experience and to the group in which it is developed, and to bring
77
value, it must take concrete shape in specific initiatives that are useful
for improving the perception that the host culture’s individuals have of
the home culture.
Cultural distance is a given: it depends on the difference that exists
between practices and values prevailing in different contexts. However,
the perception individuals have of the distance can be reduced, and it is
precisely for this purpose that cultural competence is essential. The
ability to adapt to what is different depends on the ability to grasp the
values underlying behaviour—values that condition the communication
process, thereby resulting in a greater or lesser propensity of the local
stakeholders to adopt the messages that are transmitted, and to share
information.
But What Is Culture?
A people’s culture is a consistent set of fundamental assumptions that a
given group has invented, discovered, or developed, by learning to face
its problems of external adaptation and internal integration (Schein
1984). At the level of context, external adaptation involves facing the
natural and geographic conditions of a given area, marked by the
vicissitudes of historical events that, over the course of time, have
influenced the evolution of the society operating in it. Internal
integration, on the other hand, may be understood as seeking and
implementing “glues” which, through the sharing of language, norms,
and values, guide individuals’ behaviour, condition the formation of
moral principles, and orient their ethical conduct.
House et al. (2004) accord strong importance to geography and to the
environmental conditions of the various contexts, factors that impel
people towards a greater or lesser degree of sociality, rather than towards
seeking greater independence or interaction and so on. However, looking
to the contexts in terms of country, physical geography is not in and of
itself sufficient for understanding the cultural dynamics that characterize
their different areas. In fact, it is not rare to encounter the presence of
subcultures and countercultures within the same nation. Emblematic of
this is the case of Italy, a country marked by a multitude of subcultures
that, in some cases, become antithetical to one another.
78 A. Calvelli and C. Cannavale
Therefore, analysis of cultural determinants requires more in-depth
analysis. The birth of the current nations is a recent event, in some cases
still undefined, and it is therefore necessary to look at history to
understand the transitions taking place in various areas of the planet and
the prevalence, in different areas of the same country, of essentially
different values and behaviour.
Historical perspective, albeit not very widespread, leads to interesting
considerations. The weight of historic events appears, in fact, to be the
only key to interpretation of use for explaining the similarities among
European countries that are apparently quite distant; but it is also useful
for grasping the differences characterizing certain Asian countries often
considered, in the eyes of Western scholars, to be far more similar than
they actually are.
Besides history, geography, religions, and level of socioeconomic
development are determinant factors of the differences in ways and
customs, with evident repercussions on the spoken language and on
styles of communication as well (Calvelli and Cannavale 2013).
According to the sociological theory of identity (Haller 2003),
diversity of language, religion, and the attained level of socioeconomic
development also feed the perception of diversity between cultures that,
limiting ourselves to the study of cultural dimensions, might appear
similar or homogeneous. The result of the intercultural relationship
depends on two fundamental emotions: pride and shame. Pride emerges
when one’s identity is perceived as relevant and leads to the recognition
of one’s value, and to less fear of the other. To the contrary, when one’s
own identity is rejected or denigrated, a situation of unease emerges, and
leads to mistrust and conflicts. The relationship, then, is influenced by
self- assessment by individuals, and by the assessment they develop of
their counterpart’s perceptions. If the relationship aims to involve people
from different contexts, individuals develop images that serve to
preserve the homogeneity of the group they belong to, also through the
categorization of the other. The greater the feeling of shame, the greater
the tendency to reject diversity, which is perceived as an attempt at
colonization by cultures that do not respect the beliefs and values of the
community belonged to.
The keystone of intercultural relations resides, then, in the ability of
the involved individuals to stimulate positive emotions which, depending
on the theory, are strongly connected to respect for diversity and to
valuing local habits and customs.
Looking at history in specific terms, the cultural contaminations
induced by the comparison between bearers of different cultures can
contribute to dulling the differences and emphasizing similarities and,
through a slow and gradual process, can even to lead to the creation of a
new culture; on the other hand, in this way, the melting pot, the mark of
the culture in the context of the United States, was born.
In a perspective of cross-pollination, the individualism and strong
level of competition typical of the US context have accentuated the will
to emerge in the Korean one: individual aspirations within the group are,
in fact, stimulated (Chang 1995), providing the possibility for the single
individual to emerge and elevate his or her status. The strong result
orientation characteristic of America’s culture and context has reinforced
the Korean trait of “working hard” to achieve goals, while the age-old
antecedent of Japanese domination contributed towards emphasizing
“Institutional Collectivism” and “In-group Collectivism.” This laid the
foundation for the formation of the strong government that—at least until
the great crisis of 1997—followed policies not only of removing market
distortions but also of selectively orienting industrial development and
the development of large conglomerates: the chaebol (Kluzer and
Rabellotti 1990a, b).
English domination in the Indian area, in inducing a thoroughgoing
assimilation of Western values and ways of acting that are considerably
more individualistic than traditional ones (Roland 1988), accentuated the
typical Hindu pragmatism that leads to perceiving Westerners as superior
and to accepting their practices and values, while submitting to a
hierarchical order that they themselves create in every kind of
relationship. Among other things, acceptance is seen as a positive step
for personal development, rather than as a loss of cultural identity
 The Role of Culture in Internationalization
(Upadhya and Vasavi 2006), while the religious philosophy of abandon
and acceptance in the doctrine of karma, and of social subdivision in a
rigid caste system, has only accentuated these characteristics of Indian
culture, inhibiting local entrepreneurial impetus (Elder 1959; Kapp
1963) and thus explaining India’s economic backwardness.
If colonizations have often led to cultural cross-pollination,
accentuating or modifying certain characteristics of the contexts,
geographic proximity cannot, on its own, be considered a source
generating assimilation of diversities. A significant case is that of
Mongolia: Mongolia’s culture is quite different from the cultures of
China and Russia, its two neighbours, since Mongolians have a social
structure, a language, and religious beliefs that are different from those
of the Chinese and the Russians. Ancient wars and dominations most
likely contributed to the rejection of Chinese culture and to limiting the
spread of Chinese thought which, to the contrary, influenced all the other
countries in the area. The aversion to China, which may be seen in the
case presented in the following box, has, among other things, favoured—
in spite of the strong collaboration with the Soviet Union—an approach
to the Western world, and acceptance of values that were long rejected
in the other countries with planned economies.
The nomadic life, the tendency towards a spirituality less focused on
the group, and the impervious territory did not favour collectivism, but
rather the proliferation of forms of individualism and relational systems
reduced to members of one’s own family or tribe.
The Mongolian business system is affected by these cultural
characteristics of the context, since Mongols are prevalently nomadic
and are used to being paid based on their tasks, and not on preparation
or seniority.
Assumptions and Values
Religious beliefs are a central element of the analyses regarding the link
between the culture of contexts and business development, given the
strong impact they have on the moral rules of a collective society, and
therefore on individuals’ behaviour and their expectations. In fact, Leung
and Morris (2002) recognize religiosity, understood as the influence of
79
respect for religious practices on society, as one of the social axioms
capable of conditioning the life of individuals and the relationships
among individuals within a group. In fact, religion also has a strong
impact on ethics and, consequently, on the way in which profit and
business and professional success are interpreted.
Anthropologists also emphasize the value of religion as a factor
characterizing a group’s identity. Rites, norms, and language, typical
manifestations of religion, help reinforce an individual’s sense of
belonging to his or her community, and it is precisely the communities’
will to identify practices that might help overcome moments of difficulty
and reinforce the sense of belonging to the group that would explain the
proliferation of religions in the various parts of the planet (Gaarder et al.
1999). The term “religion” is to be understood in the broad sense, as the
conviction of the existence of transcendental personal or impersonal
powers; in this, it embraces all the professions and moral philosophies
that, in determining the meaning of existence and the basic values of life,
condition individuals’ morality and behaviour.
There are various types of religion: monotheistic, polytheistic, and
monolatry. Although the distinction among these three types of religion
appears simple, in actuality, one encounters myriad religious hybrids,
and one may see how professions of monotheism mix with polytheistic
faiths, and cults of various origin are blended into particular religious
currents. On the other hand, the religious precepts of apparently distant
faiths clearly overlap: the concept of zákat in Islam is not far from
solidarity in Catholicism; individual responsibility in Hinduism is no
different from the one in Protestantism; going back through the years,
the Indo- European pantheon does not differ greatly from the Greek or
Roman one.
Albeit in the consideration that the interpretation of religious beliefs
is rather complex, there is no doubt that religion, even in secularized
societies, is a factor that strongly conditions the behaviour of individuals
and group dynamics, at least through the influence it has on upbringing
and on the institutions created in the different societies. In some societies,
religion and upbringing are completely blended, and it is hard to grasp
80 A. Calvelli and C. Cannavale
the boundaries between dogmas and social norms. This is, for example,
the case of Confucian philosophy, underlying many religions present in
the Asian area, which in some parts of China and Korea is recognized as
moral law, as a life philosophy that permeates society in its aspects of
education, behaviour, and evolution.
Although no cause-and-effect relationship between religious beliefs
and social phenomena is confirmed, some scholars have dwelt on the link
between religious precepts and teaching on the one hand, and cultural
values on the other. From this standpoint, religion would function as a
binder, amplifying the effect that fundamental assumptions, rooted in
societies through the role of institutions, have on values, and therefore
on the guidelines that inspire the behaviour of individuals and determine
their reactions to events and the behaviour of others. In this regard,
Rokeach (1973) stresses that religion emphasizes the importance of
specific values, and it is with respect to values that any influence of
religion should be sought (Saroglou et al. 2004). On the other hand, it is
precisely the transmission of religious values and of the principles of
moral philosophies in families that represents the main mechanism for
transmitting values from generation to generation (James 1902).
The relationship between religion and culture was also examined in
greater depth by Schwartz and Huismans (1995), who verified the
existence of a positive influence of beliefs underlying the leading
monotheistic religions (Judaism, Catholicism, Protestantism, and
Orthodox Christians) on individual values (universalism, benevolence,
power, result, conformism, tradition, security, self-focus, stimulus, and
hedonism). In particular, the following were identified: a significantly
positive correlation between religious beliefs and tradition and
conformism; a weaker yet positive correlation between religious beliefs
and security and benevolence; a negative correlation between religious
beliefs and other values (significant for hedonism and self-direction; a
weakness for success and power).
Continuing with Schwartz’s study, Saroglou et al. (2004) developed
a cross-cultural investigation focusing on the three main monotheistic
religions: Judaism, Christianity, and Islam. They collected data from 15
different countries through the administration of questionnaires
investigating the impact of religiosity on the importance attributed to the
various values. The authors in fact confirmed the main results Schwartz
had arrived at, finding that religious people are more inclined towards
security, tradition, and conformism, and, to the contrary, are less inclined
to value openness to change and autonomy (Stimulation and Self-
direction). Moreover, according to their results, religiosity appears to
favour values that promote the transcendence of the self, but in a limited
fashion: religious people are, in fact, inclined to benevolence, but not to
universalism. Moreover, they confirm the inverse relation between
religiosity and hedonism on the one hand, and religiosity and self-
enhancement (power and achievement) on the other, albeit with less
intensity.
The understanding of religious practices and assumptions can foster
greater understanding of the behaviours and determinants underlying
them. This is true in the settings in which religion has a strong impact on
the social view—as takes place in most Islamic countries, but also in the
more secularized societies in which the roots that culture finds in religion
are handed down unconsciously by social upbringing and by the
educational and legal system—as well on the concept of ethics and
morality, which in their evolution were at any rate strongly inspired or
conditioned by the religious currents prevailing in the specific setting. In
this sense, the interest that the greatest scholars of cross-cultural
management have shown with regard to the linkage between religious
expressions and dimensions identified in their own models appears
justified (Hofstede 1980; House et al. 2002).
Going on to investigate the roots of the main differences between
religions of the Book and Eastern religions, Gaarder et al. (1999) identify
six fundamental concepts that determine the cultural orientations in the
different contexts: conception of history, concept of the divine,
conception of man, salvation, ethics, and worship.
With respect to the conception of history, in Western religions, a
linear conception prevails: history has a beginning and an end, and these
extremes coincide with the moments of creation and of the end of the
 The Role of Culture in Internationalization
The Role of Culture in Internationalization
world. In Eastern religions, on the other hand, a cyclical conception of
history prevails, repeating in accordance with an eternal circle, from
eternity to eternity. Arrangements of the first type favour linear systems
of thought, and single-focus conceptions of time; they incline people to
investigate the cause of things and analyse the problems in a specialist
conception. The effects of these various arrangements on companies are
clear: in the former case, models of linear programming and medium/
long-term planning prevail; in the latter, the approach to decisions is
systemic, and the planning horizon is, by necessity, long term.
With respect to the concept of the divine, Western religions see God
as the creator of the world, unique, and omnipotent. To the contrary, in
Eastern religions, a pantheistic conception prevails, that sees the divine
everywhere and at any rate liable to take on a multitude of forms and
manifestations. The former approach fosters the sense of responsibility
of the individuals who must please their own God and set a sharp
boundary between what is good and what is evil; moreover, by using
well-defined conceptual categories, they tend more easily towards
interpretations of diversity based on categorization. On the contrary, the
latter approach, by exalting variety and interdependence, presses less
towards categorization, by not spurring the individual to please a higher
being. On the other hand, actions that deviate the order of things may be
negatively interpreted, and this leads to a preference for innovations in
increments and process, as opposed to discontinuous and product
innovations. The effects of this orientation on consumption are also
considerable: in Western settings, the average consumer is less attuned
to the effects his or her choices have on the surrounding environment,
although, with economic and cultural development, the concept of
environmental responsibility is taking root; in Eastern settings, however,
some foods and products might be avoided for the effects their
consumption has on animals or more generally on the environment, and
this requires careful planning of communication campaigns.
The conception of man is also important: in Western religions,
everything is subordinated to God’s will, and this increases the rejection
81
of uncertainty and the tendency to be fatalists; humans are masters of
their own choices, but resort to a higher being to mitigate the effects of
these choices, or to resolve situations of discomfort. To the contrary, in
Eastern religions, the individual is not subordinated to God, but is part
of everything God represents. Man is at the centre of his destiny, or
better, on his own path of life and evolution. Intuition and thought are
highly important faculties of human beings, and are valued for the help
they provide in achieving inner peace. In Westerners’ eyes, the
inclination to mediation leads to squandering time, and to a lesser result
orientation. This is, however, a partial vision of a practice that, for
Easterners, leads to overcoming sacrifice and to focusing on the goal.
The ability to commit is not different so much, rather, as time
management during the phases of planning—which are generally longer
in the East—and of action.
The fourth point is represented by the idea of salvation. In Western
religions, God is responsible for the salvation of individuals. Even where
individuals fail, God has the power to save them. On average, except for
the Protestant strains, Western religions are connected to a greater
rejection of uncertainty, which scholars link to their vision of God. This
entails a lesser propensity for risk taking. On the other hand, even when
there is no refusal of risk or aversion to change, fatalism leads to a lesser
orientation to the future. In Eastern religions, it is human beings, through
their intellectual capacities and their actions, who determine their own
future. There is no destiny understood in the Western sense as the
preordained path of life; individuals know they have to face uncertain
and unknown situations, and take action over time to improve their lot.
Thus, perseverance becomes a trait typical of these religions and of the
societies in which they take root: in companies, a greater orientation to
the long term is observed, also in innovation which is assessed with
regard to the possibility not so much of achieving short-term results, as
of yielding effects that are significant over time. Decision-making
processes are also different— more hasty in Western situations, and
longer in Eastern ones: if the temporal horizon is long for actions and
innovation, it is also long for relationships, and it is thus appropriate for
82 A. Calvelli and C. Cannavale
all their aspects to be carefully assessed. There is less of an inclination
towards fatalism, which generally corresponds to a greater inclination to
face uncertainty and to make an effort in view of future results.
Ethics is understood in Western religions as the set of behaviours that
regulate the individual’s relations with society. There is an emphasis on
the value of individual ethics, which must be as consistent as possible
The Role of Culture in Internationalization
with religious morality. Ethical behaviours are those that protect and
value the individual as a human being, and there is a strong consistency
between dignity and respect for individual identity. In Eastern religions,
on the other hand, a vision of the world as a unitary entity, as a set of
factors independent of one another, prevails. Morality does not regard so
much the relations between the individual and the group, and the
safeguarding of the individual, so much as, rather, the protection of the
group as an entity in which the individual grows and develops. The focus
of ethics, then, shifts from the individual to the collective, and any
behaviour that protects the group, even to the detriment of the individual,
is accepted as consistent with morality. The individual sacrifices him or
herself for the group, and at the same time draws the benefit of belonging
to a group. Actions and behaviour are not assessed individually, but in
accordance with a broad cycle that passes through various phases of life.
In this perspective, children sacrifice their own carefree lives and their
right to education in order support the group, through their own labour;
but they know that at an advanced age, in their own lives, they will enjoy
the assistance of those younger than them. In companies, it is customary
for employees to work more than the agreed-upon hours; employees
sacrifice themselves for the company and in exchange receive the
company’s material and moral support.
Worship is also profoundly different: in Western religions, it is
essentially based on prayer and preaching, emphasizing paternalism and
authoritarianism as mechanisms of social regulation. These mechanisms
reinforce hierarchical distance—which, however, cannot be understood
as a trait typical of all Western religions—as well as the propensity for a
lesser emphasis on performance and the long term. It is the leader who
bears responsibility for subordinates. However, this cultural trait is not
typical of all Western cultures; to the contrary, the countries where
Calvinism and Protestantism are widespread are more inclined towards
making individuals accountable, and towards performance. In Eastern
religions, on the other hand, worship consists mainly of meditation and
sacrifice which, in many cases, are fused with the everyday.
The authors’ perspective is interesting, and drives towards an initial
reflection as to the macro-differences existing between the religions that
have the most influence on Western business culture and on those that
have greater impact on Eastern culture, which leads to reasoning on some
initial significant differences. This analysis perspective, however,
appears reductive in that it is incapable of grasping the influence of the
religious values of the southern hemisphere and, above all, of grasping
the range those religions have as a bridge between East and West.
Moreover, the various belief systems grouped into the two categories at
times present so many differences as to raise doubts about being able to
include them in so broad a category.
National Culture and Business Culture:
A System of Interactions
It is the well-established opinion of leading scholars on the subject of
culture and international dialogue that business culture is to be
interpreted as the result of an interactive process between organizational
culture and national culture (Child 1981; Dorfman and Howell 1988;
Schneider and DeMeyer 1991; Trompenaars 1993), and that the
alignment of business strategies, of structures, and of managerial
practices with the cultural variables of the outside environment lays the
groundwork for increased effectiveness in managerial action, and for
higher- performing results (Burns and Stalker 1961; Wilkins and Ouchi
1983; Prescott 1986; Denison 1990; Kotter and Heskett 1992; Powell
1992; Earley 1994; Newman and Nollen 1996).
On the other hand, if business is considered an open system,
interacting with the subjects and with the elements of the environment in
which it operates, it may naturally be thought that the culture of the
individual organization is highly influenced by the traditions,
 The Role of Culture in Internationalization
convictions, values, attitudes, and norms of the community it is included
in.
In the past, the interaction of outside (national) culture with the
internal one (the organization’s) was often underestimated, and certain
authors, including Hickson (1974), maintained that industrial logic could
be affirmed with its own rules in any cultural setting, thus stabiliz-ing
the relationships between the structural characteristics of the
organizations and the variables of context.
In other research, the link was considered only in a perspective of
one- way dependence and, during the 1980s, Hofstede (1980) found a
predominance of national culture over that of the individual
organizations, in a sort of subordination and adaptation of specificities
to beliefs and values of a broader cultural sphere.
Subsequently, other authors, including Adler (1986), maintained that
national culture could rarely be glimpsed in companies, since the culture
of an organization, by moderating or cancelling the national one, made
all the actors in the same organization similar, even if they came from
different contexts. In this sense, the organizations’ culture implicitly
predominates over the beliefs and values consolidated in the countries of
origin; emphasis is placed not so much on the culture of the contexts in
which companies operate, but on that of the nations of origin of the
members of the organization.
Only later theoretical and empirical research, supporting Hofstede’s
hypotheses and focusing attention on the players’ behaviour, also
highlighted the role played by the cultural factors of the various settings
the organizations are included in. The underlying hypothesis of these
studies is that both the internal and external culture exert an independent
influence on the behaviour of the members of an organization.
Drawing from this climate of interdependence, it appears appropriate,
then, to state that the company cannot be considered as a mere receiver
of outside stimuli, but as an actor that creates its own culture in
symbiosis with the environmental context, by interacting with it and
contributing to its formation and change (Calvelli 1990). If this approach
is accepted, the company is to be understood not only as a constituent
83
element of the environmental context but also as a factor determining the
development of a certain area or country.
In fact, in the hypothesis of the existence of a circular-type company/
environment link, only if the company is innovative and a bearer of new
values is the groundwork laid to generate a self-propelling process of
development for the area in which it operates.
The interaction of these two cultures, one environmental and the
other belonging to the “dominant coalition” that takes shape in any
company, contributes towards outlining a given organization’s way of
being or, in other words, its culture. This means that except for cases in
which the business culture has specific features to distinguish it from the
national culture or from that of other sub-areas of the country, the
analysis of national culture (or the culture of local sub-areas), is
fundamental, because it acts upon business culture, influencing its
management style and, indirectly, its performance as well.
It is precisely the specific features of certain cultures of countries—
or of sub-areas of countries—that have at times determined
organizations’ competitive advantage. This is in keeping with the
concept of neo- localism that Varaldo (1994) arrived at when
emphasizing the role of intangible resources, in exploiting the local
dimension, as a source of competitive advantage and, more generally, in
terms of information and knowledge. The nature of these resources is
such that a company cannot appropriate them by traditional means, but
only through a process of interaction with the environment that results in
overcoming the perspective of dependence, both of the company on the
local environment, and vice versa.
Confrontation Between Business Culture and Cultural
Change
In inter-organizational relations, based on the possibility of the growth
of knowledge (scientific, technological, and market) of the individual
partners, an initial convergence of interests is not, in and of itself,
sufficient to guarantee the agreement’s success, since the key variable in
forming and maintaining a joint venture lies essentially in striking a
84 A. Calvelli and C. Cannavale
balance among the cultural incompatibilities of the companies placed in
confrontation with one another.
In fact, every company tends to act by preserving its beliefs, values,
and organizational structure, designed consistently with its cultural
components; this means that, in international joint ventures, the clash
between different cultures often leads, as has been stated, to negative
consequences for the partners’ performance, for the working
environment, for future productivity, and for the players’
competitiveness (Beamish and Lane 1990; Meschi and Roger 1994). For
some scholars, it is in fact far simpler to overcome the cultural
incompatibilities existing between different nations than those due to the
encounter between two organizations.
On the other hand, the reduction of the protectionist barriers, the
opening of new markets such as the Asian market, and the creation and
gradual extension of free-trade areas contribute towards outlining a new
competitive scenario for companies. No longer can they target the
national market alone, or place their faith in government protections;
they must increasingly orient themselves towards strategic and
organizational solutions that permit gradual affirmation on external
markets and the raising of higher defences against foreign competition
on the domestic market. For this affirmation to take place, assistance is
offered by alliances among international companies. These alliances
may reconcile specialization and flexibility, and guarantee to the
companies involved access to new markets, the acquisition of new
technologies, lower research costs, and a greater capacity for innovation
(Lorenzoni 1990).
Given, then, that forms of collaboration are a preferential road for the
development of business activities, the following question bears asking:
“what mechanisms are to be activated in order to try to smooth out the
differences hindering collaborations between culturally distant
companies?”
Paradoxically, if collaborations between companies are hindered by
cultural differences, at the same time, under certain conditions, they
provide a sound thrust towards the cultural change of the partners in the
agreements.
In this regard, many authors (Gagliardi 1995; Bollinger and Hofstede
1989) believe that a company’s culture may be modified only by way of
a cultural grafting from the outside. In this perspective, cooperation
between culturally different companies—as opposed to the assumption,
within the company, of bearers of different beliefs and values—can be
an effective solution to the problem of cultural change. This is because
the new managers can impose, brusquely and from information provided
earlier, their own beliefs and values, thus impeding that dialectical
confrontation that can develop assimilation, learning, and sharing.
In cooperative efforts among companies, however, provided there are
no positions of one partner being subjected to another, and no unilateral
opportunistic aims of quasi-colonization, the grafting of one culture onto
another may take place without traumatic clashes, especially if the
players, encouraged by the same level of motivational investments, are
able to establish a constructive confrontation with one another. The
dyadic relationship may lay the groundwork for a smoothing of cultural
differences, through understanding, imitation of successful behaviour,
and mutual respect for diversity.
Clearly, however, these changes cannot take place suddenly, but
require assimilation times. Cultural change is possible, not in a total and
abrupt way, but gradually and continuously, implemented through
cumulative, discontinuous changes in beliefs and values. The success of
cultural change therefore requires that the casting aside of knowledge
and the replacement of old assumptions with new ones—which for some
scholars (among others, Osland 1995) are the foundation for change—
not take place as an imposition (which is generally not .
accepted, the more widespread and shared the culture is in the
organization) or as a revolution (often the cause of crises and of
irreparable conflict). The change process must, in the manner of Lakatos
(1993), be incremental and gradual, aimed at creating acceptance of
better knowledge that makes a richer contribution than prior knowledge,
 The Role of Culture in Internationalization
thus safeguarding the specific cultural features that the new knowledge
neither refutes nor “belies.”
Given this, the more dissimilar the partners’ cultural variables are,
and the more asymmetrical mutual knowledge is in the phase of initiating
the agreements, the greater is the time needed to assimilate differences,
and the higher are the obstacles to be overcome for active collaboration
among companies in different settings.
It may be thought that cultural differences are broad when
considering, as terms of comparison, companies operating in countries
with advanced economies, in developing countries, and in European
countries that once had a planned economy. These are countries with a
different degree of economic development and a different distribution of
means of production: on the one hand, there are countries that were for
years marked by the absence of private entrepreneurialism; on the other,
there are countries with a market economy, of which competition and the
entrepreneurial spirit are a distinctive trait.
However, elements of diversity of a cultural type also exist if the
confrontation exclusively affects companies operating in countries with
an advanced economy, and sometimes are evident enough to lead to
difficulties in establishing collaborative relationships, or to the failure of
those in existence.
Cultural Characteristics in Certain “Culturally
Homogeneous” Contexts: Impact on Local Entrepreneurial
Systems USA–Japan
The conflict between the objectives of individuals and the interests of the
groups with which the individual interacts is often at the centre of the
debate over the cultural differences of companies and of the contexts in
which they operate. The confrontation is often also synonymous with the
behavioural differences between American and Japanese companies.
Collectivist societies target their efforts towards preparing
individuals to accept the beliefs and values of the groups in which they
operate, while individualistic societies encourage targeting individual
efforts towards achieving one’s own specific interests (Wagner and
Moch 1986), and this can slow the growth of the economy and of a
85
nation. In fact, the significant negative relationship found by Hofstede
(1980) between levels of individualism and the rates of development of
GDP led the author to suggest that, in the countries with developed
economies, individualism is a factor impeding economic growth.
Later research found that economic development sees faster growth
not only where there are low levels of individualism, but also in the
presence of a high “long-term orientation”; this factor was dubbed
“Confucian dynamism” (Hofstede and Bond 1988; Hofstede 1991), in
keeping with the future-oriented principles that condition societies’
development trajectories, such as perseverance, parsimony, a sense of
modesty, and a scale of priorities of bonds.
The results of this research, however, have been the object of critical
debate in the economic literature, since they overemphasize the impact
of only two dimensions of culture (albeit a compound impact) on a
country’s economic development, neglecting the other potential
conditioning factors. However, they at least have the virtue of
highlighting that the study of a context’s culture must not be neglected
in analyses regarding the growth conditions of a nation and of the
companies operating in it.
The cultural dimension of individualism/collectivism plays an
important role in the organizational problems of major multinationals
that, by necessity, must govern a variety of behaviours and cultures
present both in internal environments and in the external ones of
associated entities.
Major corporations not only have to manage the complexity of a
human capital that contains a more or less broad cultural diversity but
must also operate in contexts that may often be culturally distant. Central
managers must often seek to reach a sort of compromise between
encouraging the individual freedoms of the peripheral managers and
exalting the collectivist spirit, thus incentivizing both the creativity of
individuals and the cooperation that creates learning synergies. In both
cases, risks are run that, in the case of a preference towards
individualism, may lead to opportunistic degenerations of local
managers and to a general trend for them not to collaborate with the other
86 A. Calvelli and C. Cannavale
members of the organization; in the case of a preference towards forms
of collectivism, if these are not spontaneous, but are imposed by the
centre, they may lead to degenerative forms of conformism, bureaucracy,
rigid decision-making, and loss of professionalism (Morris et al. 1994).
In inter-organizational relations, above all international ones, the
presence of a strong individualist spirit, as often takes place on the
domestic market, should raise a barrier to the achievement of
collaborative agreements among companies. The individualist spirit
should impede the birth of forms of collaboration with foreign partners,
while the collectivist spirit should, at least by its own nature, speed the
process of creating systems of collaboration. On the other hand, a more
careful reading of the obstacles standing in the way of international
collaborations, along with a study of concrete cases, leads to rejecting
these assumptions nearly altogether.
Generally, a company that opts for a collaborative relationship aims
to solve strategic problems that it cannot overcome with its own forces,
and seeks to achieve more efficiently or in a more limited time the pre-
established strategic goals. Achieving these results requires no small
amount of time, for that rapport of trust ensuring stability in the
relationship and the achievement of synergies of results to be created
among the partners.
In a short-term perspective, only opportunistic and contingent
purposes are emphasized, and the advantages that are gained are
generally unilateral, favouring the actor that abandons the initiative when
the premises that were decisive when the agreement was made no longer
exist—essentially, when the partner acquires the knowledge it did not
possess; there may also be a phenomenon of cannibalism when the
partners, upon gaining possession of the knowledge they did not possess
earlier, become competitors of the partners whose knowledge they
assimilated.
Among the determinants contributing to the rise, in the English-
speaking world, of an individualist orientation, an essential role was
played by the Protestant ethic which, in the sphere of working
relationships, exalts the Judeo-Christian conception of the importance of
the single individual and of his/her value, and the separation between
ownership and control that is characteristic of the large modern
corporation. As regards this last point, the ownership/control split has
multiple causes, ranging from the inability of founding groups to
guarantee all the financial resources needed for the company’s
development, to antimonopoly laws (United States and Great Britain)
that boosted reliance on the stock market.
The fragmentation of the shareholding structure, which does not
favour stable control, often leads to the rise of an opportunistic mentality
in company managers oriented towards contingent situations and short-
term results.
This behaviour, oriented towards legitimating one’s own position
rather than towards adopting decisions in the company’s long-term
interest, creates, in the first place, a sort of “tyranny of accountants,” by
which company managers operate on the basis of a deeply rooted
conviction that future results depend on short-term results (Abegglen and
Stalk 1988). In the second place, the objectives of companies pursuing
opportunistic purposes are generally set in such a way as to strengthen
the competitive advantages already acquired, and the managerial
perspective is not particularly aimed at developing learning processes
allowing new competitive advantages to be achieved (Hamel et al. 1989).
As regards the first point, it bears noting that the achievement of
short- term “concatenated” objectives is possible only if the environment
is mechanistic in type, which is to say governed by predictable laws of
evolution and by recurring phenomena. Only on these premises can the
manager suppose that short-term and low-risk investments can generate
the foundation for future investment with the same characteristics. In the
current economic phase, however, environments are evolving
discontinuously and turbulently, and this impedes the formation of a
rational planning of the actions to be implemented.
As to the second point, the short-term orientation entails, on the one
hand, interpretative distortions in the forecasts of future results and, on
the other, the affirmation of an individualist spirit in business managers,
aimed at pursuing contingent objectives above all. The contingent
 The Role of Culture in Internationalization
perspective is by all means a factor hindering the maintenance of
collaborative relations with foreign partners, and thus contributes
towards the relationship’s early conclusion.
The culture of the English-speaking world is more oriented to the
individual than the group, and is highly ethnocentric. Companies are
very hierarchical, with exclusively top-down relations, and with a limited
willingness either to submit decision-making to the consensus of other
parties, or to implement manoeuvres of external growth, since they are
more oriented towards a “single-company and multi-divisional” type of
organizational structure. Often, major multinationals adopt the form of
the multi-company group not as a deliberate choice, but out of a need
induced by operating in different countries; in any event, multinationals
seek to obtain control of outside companies by acquiring majority capital
(Dematté 1996). The result is that the forms of partnership with a
company in the English-speaking world may often be temporary, as they
are destined to transform following acquisitions.
Working in the opposite direction is the Japanese company operating
in a setting that is both ethnically and religiously homogeneous, marked
by a collectivist culture, by a strong nationalist spirit, and by beliefs and
values of ancient feudal tradition. The company is understood as a long-
lasting community projected into the future, and not as a cash-flow
machine oriented to the short term.
The particular structure of the Japanese company determines
stability: management, since it does not have to continuously legitimize
its doings by distributing high dividends, can adopt investment decisions
oriented to the long term and pursue objectives like growth and
increasing market share.
Japanese collectivism has its roots in the principles of Confucianism:
attention to the immanent rather than the transcendent; the achievement
of harmony (“mean”) between men and nature, to be attained in earthly
life; a vision of the individual as an active subject in earthly life; a focus
on the existing relationships among the members of one’s own group;
filial piety (taking care of one’s parents and ancestors); and reciprocity.
87
While the centrality of relationships is one of the bedrock principles
of Confucianism, hierarchy is equally important. In fact, Confucius
identifies five categories of hierarchical relationships upon which all
society is based—ruler/subject, father/son, husband/wife, elder
brother/younger brother, and elderly/young (Punk et al. 2001). These
principles led to a high degree of “power distance” in society and in
companies.
Moreover, in Japan, Confucian culture gained strength by uniting
with Shintoism, and this union fostered the development of concepts like
group spirit and respect for authority, obedience to leaders, collectivism
widespread throughout the nation, collective concerted action, and
reciprocity to the point of its most obvious manifestation: lifetime
employment.
This union also led to the rise of forms of organization permeated by
the spirit of association, in which decisions represent a collective will
and relationships among the players privilege relational exchanges of
knowledge.
Japanese and American cultures present a clear dichotomy: one need
merely compare the emphasis on trust, typical in the Japanese world, and
the criterion of opportunism, which often underlies relationships in the
English-speaking world. For the Japanese, the positive outcome of a
collaborative relationship depends on commitment, trust, the partners’
good faith, and the mutual conviction that collaboration makes the
players stronger, since they possess complementary knowledge and
skills (Ohmae 1990); on the other hand, for operators in the English-
speaking world, it is necessary to choose a compatible partner, with
complementary products and markets, from which to learn as much as
possible without having to reveal one’s secrets.
The Japanese model is a sound basis for developing forms of
collaboration, at least within domestic markets: the company is
understood as a community, it is permeated by group spirit, and any
decision is the result of collective concerted action; there are top-down
relationships, but also bottom-up relationships, as well as sideways ones,
which involve informal interactions between decision centres operating
88 A. Calvelli and C. Cannavale
at different hierarchical levels. The informality of internal relationships,
extended also inside the company, can guarantee an alliance’s success;
many research works on the theme have in fact demonstrated that the
most advantageous components for the stability of partnerships include,
in fact, that of control exercised through informal and interpersonal
bonds, rather than through formalized systems (Kanter 1994).
For the exchange of knowledge within the company and among
companies, the Japanese have developed, within their domestic confines,
a particular relational capacity aimed at sensing the needs of individual
players inside and outside the company, and at developing a cumulative
process of growth of contextual and synergistic knowledge. Preference
for a type of cognitive process that emphasizes human problem-solving
abilities rather than impersonal, rational, and analytic factors creates a
group harmony and a trend to develop a system of friendly relationship
among individuals.
Greater opening to learning new knowledge creates, in Japanese
companies, a particular spirit of adaptation to new environmental
situations that may arise (Abramson et al. 1993).
The holistic conception of the market is particularly evident when
analysing competition which, in Japan, does not take place among
individual companies but among groups, among keiretsu, which is to say
clusters
The Japanese Market: Stable Relationships Based on Trust
Entering a network of established relationships is no easy task for
Italian companies, given the emphasis Japanese companies place
on stable relationships and mutual trust.
While having relations with Japanese companies is difficult, it
is also the case that once an agreement is reached and the operators
are in house, it is rare for the underlying contract to be cancelled or
not to be renewed over simple financial issues. Establishing
collaborative relationships with Japanese companies is rather hard,
but once they have been reached, the Japanese counterpart will
seldom dissolve the contract or fail to renew it over a simple
difference in price. At the other extreme, price difference is the key
variable on which
American companies (and Western ones more generally) evaluate
whether to start, continue, or interrupt a collaborative relationship.
Often, this variable prevails over other factors, such the product’s
quality and the partner’s reliability.
In the 1990s, in an agreement reached with a Japanese
company by an Italian footwear producer, economic and
financial data were overshadowed by personal relationships.
Before the contract was signed, numerous direct contacts were
made with the foreign partner, which attended Italian trade
shows with a certain frequency, while the Italian company
systematically attended trade shows in Tokyo and Osaka. The
Italian company, to win its partner’s complete trust, made
exports without requiring an irrevocable and confirmed letter
of credit on an Italian bank (the procedure normally followed),
but requesting direct payment and wire transfers (procedures
applied to relationships with customers of long standing and
proven reliability).
(Source: DSAQ Database)
of companies with a leader company at their centre, bound to one another
by intersecting ownership relationships. The culture within the Japanese
company, with its emphasis on cooperation, trust, and the relational
perspective, can also be extended to relationships between Japanese
operators and foreign players, provided that, as already stated, the
foreign partner can conquer the trust of local businesses.
Also decisive to the creation of a relational system within the country
was the role of institutions: in Japan, MITI did not merely incentivize
companies and introduce and spread new technologies and new products,
 The Role of Culture in Internationalization
but it also promoted cooperation agreements both among domestic
companies, and between domestic companies and foreign ones.
Japan–China
As with Japan, Confucianism is the cultural template of China and of
many neighbouring areas where Chinese emigrants helped spread their
culture.
While in Japan, the membership group is the whole nation, in China,
the group is formed by all those who have joined the “extended family”
through relationships of guanxi.
While in Japan, Confucianism was reinforced through union with
Shintoism, thereby impacting the culture of society and of local
companies (obedience to leaders, collectivism widespread throughout
the nation, collective concerted action, and reciprocity to the point of its
most obvious manifestation: lifetime employment), in China
Confucianism, in most cases, united with Taoism (the religion of the
humble), in turn differentiating China’s culture from Japan’s.
Underlying Taoism is the concept of Tao, the absolute truth, which
embodies the continuous becoming and transforming of nature through
the ongoing dialogue of the two opposites (Yin and Yang) it is composed
of: there are no clear separations between good and evil, or between past,
present, and future.
However, unlike Confucianism, Taoism focuses on the individual
rather than on the group; it is in fact the individual who, through
meditation, the “inner silence and fasting of the mind,” can achieve
absolute truth. Therefore, if Confucianism preaches man’s active
participation in society and controls nature for the purpose of re-
establishing balance and harmony, Taoism sees man as a passive
spectator, and preaches the ability to let oneself be transported by events
(Hooker 2003). The union between Confucianism and Taoism gave rise
to:
– that particular collectivism found in China—a “group” collectivism
(as defined in studies on the cultural dimensions of the Globe,
reported in Calvelli and Cannavale 2013) that involves renouncing
one’s interests for the good of the group’s members, and, at the same
89
time, a sort of individualism with regard to members of other groups.
At any rate, the Chinese managerial system is based mostly on family
enterprises revolving around the figure of the head of the family, in
which information is spread in accordance with a top-down
mechanism. In China, there are no quality circles within large
companies, just as there are no networks of companies like the
kereitsu;
– a highly active attitude in economic life, because work and money
can allow the head of the family to guarantee the security of the
members of the extended family and to respect harmony, and a
passive attitude towards political life, in the choice of rulers; and
– a large “power distance,” in society and companies, involving high
acceptance of protection exercised by the eldest members of the
“extended” family and by local politicians. Protection by political
rulers is to be understood not in the sense of guiding the companies’
development, but rather as a sort of paternalism, by which the unit
of reference of the Chinese individual has always been the family
rather than the State (Li and Karakowsky 2002). Therefore, risk
aversion in China is lower than in Japan, and the Chinese tend more
to set up their own businesses rather than to work in the employ of
others. The high power distance also involves a lack of flexible
communication between the different levels and, conversely, a
highly hierarchical communication.
The particular nature of Chinese culture also has a determinant
influence on the inter-organizational relationships between Chinese and
Western companies (Parmentola 2010). As already stated, if the Chinese
show a collectivist spirit within their own family and clan, they prove to
be highly individualistic in their relations with parties outside this
restricted environment, and this is also the case for relations with foreign
companies.
Given this, relations with Chinese companies are difficult to initiate,
and are at the same time unstable. The difficulty in initiating relations
lies both in the difficulty of establishing contact with the Chinese partner
and in the complexity of the negotiating process.
90 A. Calvelli and C. Cannavale
As to the first point, in fact, it is known that entry into China cannot
take place without an intermediary bound by a relationship of guanxi
with the Chinese partner. In China, relationships are always between
people and never organizations, and are always informal in nature
(Parmentola 2013). This is also because China’s private law system
exists only in embryonic form, so contracts have little or no value.
In addition, the Chinese are quite skilled negotiators: in general, they
let the Western partner make the first move, and then start making new
offers and counteroffers on concrete terms. In many cases, they can push
the negotiation phase ad infinitum, until the counterpart ends up yielding
on issues that initially may have appeared nonnegotiable. Respect for
hierarchy is essential for proper interaction with the Chinese counterpart.
The Western interlocutor should thus avoid addressing the individual
members of the group, and conduct the negotiation by always addressing
its most senior member, also because only he or she can decide how to
run the meeting and, where necessary, whether and how to involve the
others. Slow decision-making, the result of rigorous respect for those
who are older and wiser, and of the obsessive fear of making a mistake,
is the characteristic element of the Chinese way of negotiating. However,
the Western interlocutor can rarely identify the key points and the
priorities for the Chinese—who consider the long-term implications of
each detail—and is often unable to guide the talks to his or her own
advantage.
The influence of Confucian ethics is at the origin of the Chinese
expectation of conducting all phases of the negotiation directly with
Western top management. However, Western companies often prefer to
send, at least to initial meetings, young managers without any real
decision- making power, in the illusion of “not wasting time.” This is a
decision incomprehensible to the Chinese, who interpret the absence of
company leaders as a clear sign of poor manners, and even of disinterest.
The Chinese require—often explicitly—that only the company’s top
leadership be involved in the negotiation (Weber 2005).
Negotiations are very long, and they reopen as soon as the first
problem arises, as soon as the financial situation of the company and of
the environment outside the company changes. This is why it is
important to immediately establish common goals and to clarify how
they are to be achieved, without taking anything for granted.
Once the complex negotiation phase is completed and the agreement
has begun, the Western partner must continuously monitor the Chinese
partner’s behaviour. Unlike Japan, business relationships in China
follow a utilitarian logic; the foreign partner will never join the Chinese
partner’s restricted family clan, and the Chinese partner will have no
problem— should the opportunity arise—violating one or more clauses
of the agreement in order to obtain better results (Alston 1989). The
Chinese partner, after acquiring the necessary knowledge, tends often to
dissolve the alliance, or even to acquire the stake in the foreign company
(Rui and Yip 2008; Wu 2005). Many Sino–foreign joint ventures
established in the Chinese context have ended with the Western partner’s
exit. This is why many foreign companies prefer to internationalize in
China through the establishment of the WFOE.
Korea: A Cultural Hybrid
As things currently stand, North and South Korea are culturally and
economically different realities. After the war, the country was divided
along the 38th parallel into two areas of Soviet (North Korea) and
American (South Korea) influence. The part under American influence,
which became the Republic of Korea or South Korea, was, under
Japanese domination, the less advanced area of the country:
industrialization had in fact favoured the country’s northern portion, both
for its strategic proximity to China, and for its richer sources of energy
and mineral deposits. In Japan’s plans, the country’s south was to
become the reservoir of agricultural products for the motherland, and the
site of light industry, in particular the textile and food sectors (Molini
and Rabellotti 2002).
After partition, South Korea, under the influence of American
economic principles, was marked by a development process that led to
its transition, over the course of a few decades, from a prevalently
agricultural economic system to a technologically advanced
industrialized economy. To the contrary, North Korea, in keeping with
 The Role of Culture in Internationalization
the principles of the planned economy that characterized the Soviet
Union, despite faint signs of development, followed a theory of self-
reliance and progressively weakened the national industrial fabric,
depriving it of the exchanges needed to sustain the development of
businesses. In particular, the focus of state investments in support of
heavy industry also penalized the manufacturing industry, leading to the
emergence of large state enterprises that over time became
technologically obsolete.
The cross-pollination between Japanese and American culture
created unique cultural dimensions in Korean society:
-The intermingling between American individualism and Japanese
collectivism led to a group collectivism that was binding only on family
members or on members of a chaebol. In Korea, the concept of group
took on a rather restricted meaning, limited to members of one’s own
family, to those originating from the same geographic region, or who
share the same academic background. Hiring privileges these relations
as well, especially for the creation of sharing and harmony within
organizations.
– American influence also led to a high degree of orientation towards
results and performance, and to achieve them, the Korean works
“hard.” It is no accident that the working hours per person are among
the highest in OECD countries (45.9 hour per week in 2003) (Yang
2006). A Korean employed in one of the large enterprises competing
on the global market generally works upwards of ten hour a day, and
often, projects are in fact completed before the established deadlines
(Cho and Yoon 2001). This is one of the main stimuli spurring
Koreans to work to achieve success in their careers, and therefore
justifies the high level of assertiveness.
– Japanese influence led the South Korean government to take on a
guiding role in developing the local business system. Out of all of
East Asia’s newly industrialized countries, South Korea was one of
the most interventionist: in planning, directing, and controlling
companies and financial institutions, it decided how to guide
91
incentives to achieve objectives of economic and social
development. As with Japan, state protection also led to a high
degree of uncertainty avoidance in the individual components of
South Korean society, mitigated by the collectivist orientation
existing in groups. To minimize uncertain and unexpected situations,
Korean institutions tend to set very strict rules and laws, seeking to
control every aspect in the life of individuals and companies; in
Korea, no businessman can rise to the leadership of a major company
without support from the government or from some political leader
(Chang 1988). The financial system itself is strictly controlled by the
State, which also played an essential role in the development of the
large groups of companies, or chaebols. The government launched
the country’s economic development plans with the identification of
sectors strategic to the economy and gave chaebols incentives to
invest in these sectors. Companies were helped by tax exemptions,
easy access to imports, an export-friendly exchange rate, and the
defence of local products on the domestic market thanks to customs
policy (Rabellotti 1995). Moreover, the Korean government allowed
these companies to access foreign funds, guaranteeing loan
payments in the event the companies were unable to make them.
Foreign investments thus financed a large portion of investment
projects, particularly until the late 1990s (Hattori 1997);
– The impact of Japanese culture also led to the search for harmony
and the creation of interpersonal relationship among the individuals
in society and in companies. The importance of interpersonal
relationships is emphasized by the concept of jeong, which is to say
the emotions and feelings (positive or negative) that bind individuals
(Yang 2006). Korea was, in fact, the “society of jeong” or “the
society of human feeling,” bearing witness to the importance of the
bonds of emotion and empathy that are spontaneously created among
different parties that find themselves interacting with one another.
92 A. Calvelli and C. Cannavale
The family capitalism of the South Korean chaebols, controlled in
most cases by the founders or their family members (brothers, sons, of
daughters), who have key roles within the organization, presents a strong
obstacle to creating international relationships with foreign companies.
In addition, chaebols are also little inclined to stock market listing
(despite the companies’ large size) out of fear of losing control over the
group’s companies (Profumo 2008).
Founding partners of chaebols have traditionally held direct control
over the entire group of companies, with a portfolio containing majority
stakes in the controlled companies (greater than fifty plus 1% of the share
capital). Over time, these parties have reduced their direct stakes in
favour of a system of “interlocking ownership” of stakes among the
controlled companies, but this has not undermined these groups’
governance structures, which are still strongly controlled by the founding
family (Chung et al. 1997; Kim 2003). Minority investors, then, cannot
have any type of influence over the governance of the chaebols.
Moreover, the shares held by foreign parties—whose stakeholding in the
capital of Korean companies was forbidden until 1992—are particularly
small.
In organizational terms, the strong role of the family system in the
chaebols translates into the strong power and undisputed leadership of
the founding partners, who influence the running of the companies but
above all their corporate culture.
Moreover, chaebols have a high orientation towards technological
innovation.
Korea long neglected investment in research and development
(Sakakibara and Cho 2002). For many years, Korean companies mostly
adapted foreign technology imported through the turn-key acquisition of
plant, the purchase of machinery, the use of foreign consultants, and the
sending of Koreans technician abroad. Only in the 1990s, through the
chaebols, did R&D investment become considerable and comparable
with that of the leading industrialized nations.
In fact, over the years, the chaebols diversified the sources of
technological acquisition in the following ways:
– By investing directly in their own research institutes
– By creating research centres abroad
– By reaching cooperation agreements with the leading Japanese,
American, and, most recently, European multinationals
As to the first point, mention is to be made of the Samsung Advanced
Institute of Technology (SAIT), one of Korea’s leading private research
centres. Inaugurated in the late 1980s, it brings together about 1000
researchers, many of whom recruited from among Koreans trained at
universities abroad.
On the other hand, as regards the creation of research centres abroad,
the entrepreneurs of the leading chaebols have introduced their own
researchers, with in-depth work and study experience in the United
States, into such high-tech areas as Silicon Valley, for example.
Lastly, a third way followed by the chaebols to acquire technologies
has been that of reaching collaboration agreements with some of the
world’s leading companies, above all from Japan (e.g. Nissan, NEC, and
Fujitsu), the United States (General Motors. AT&T, IBM, Compuserve,
etc.), and, albeit to a lesser degree, Europe (Mercedes Benz, ABB,
Ericsson, Alenia).
In this framework of technological cooperation, the Korean partner,
initially weaker as regards basic technology, was able to make a
significant contribution in terms of process and product technology.
With the success achieved in recent years in certain high-tech sectors
(semiconductors, telecommunications, robotics, computers, and the
aerospace industry), chaebols have proved to have acquired the
technological capacity needed to face world-level competition. They
have followed a process of technological development characteristic of
“latercomer” firms (the “catching up” process): from imitation to
adaptation, to endogenous innovation, and lastly to overtaking
technology leaders on the technological frontier.
A useful indicator of the improvement and intensification of R&D
activities is the increased number of patents: as the above shows, Korea,
as early as the late 1990s, became the world’s number-five country in
 The Role of Culture in Internationalization
terms of number of patents registered, after Japan, the United States,
China, and Germany (Kim 2000).
Given this information, it is clear that collaboration between Western
companies and South Korean companies is realistically possible only for
As to entry via commerce, mention is to be made of the EU-South Korea Free
Trade Agreement—the first commercial agreement with an Asian nation. The
agreement eliminates customs duties for industrial and agricultural goods,
with a progressive and reciprocal approach.
The EU-South Korea Free Trade Agreement
The EU-South Korea Free Trade Agreement entered force on 01 July
2011, and is the first completed agreement of the new generation of
Free Trade Agreements launched by the EU in 2007. The agreement
excludes only a limited number of products from the elimination of
tariff barriers.
The presence of an “origin protocol” serves to determine the notion
of original products to which the duty reductions established by the
agreement can be applied. Under the Agreement, goods of preferential
EU origin will benefit from reduced duties when importing into the
Republic of Korea and, conversely, goods of South Korean origin will
benefit from lower tariffs when exporting to an EU country. Moreover,
by the end of 2016, duties (which currently average 11.2% in Korea
and 5.6% in the EU) will be abolished for approximately 97% of
products. The certification of the goods’ preferential origin must take
place as follows: for shipments amounting to under €6000, the invoice
will have to declare the preferential origin in accordance with the text
indicated by the agreement; for shipments of a greater amount, a
customs authorization conferring the status of “exporter authorized to
make declarations of preferential origin on the invoice” will be
required.
India
India is a composite of various and multiple cultural influences, the
expression of a great many colonizing peoples. In fact, its variety of cultures,
religions, ethnicities, and languages is rivalled by few other countries in the
world. Many ethnic groups co-exist within India, including Indo-Aryans
93
those high-tech companies that can operate in synergy with South
Korean ones and offer, to the network of relationships, contributions
with a high knowledge content.
(72%), Dravidians (25%), and Mongols (3%). More than 1600 languages and
dialects are spoken in India, and many religions are practised. Indian culture
is therefore permeated and shaped by the co-existence—peaceful and
otherwise—of many other cultures (Sorrentini 2009).
Hinduism, the prevailing religion, unlike other religions, has no founder.
More than a single religion, it is a set of different religious movements sharing
certain fundamental principles.
The first of these regards the cycle of rebirth (samsara): upon dying, every
creature is reborn in another body—plant, animal, or human. The passage of
existences, or the succession of rebirths that is broken when the Indian
discovers the final nature of reality, is seen as a drama from which one wishes
to free oneself with the aid of certain techniques, like yoga and meditation.
The second principle leads Indians to follow (Sinha and Kumar 2004) a
non-sequential logic in which actions are judged for what they are
intrinsically, rather than for their outcomes. In this perspective, “The present
should not be regarded as a means to future satisfaction, but as a satisfaction
on its own” (Lannoy 1971). Therefore, in social life and at work, the Indian
focuses on the process and not the outcome, and this may cause anxiety and
distract individuals from complete concentration on performance (Pande and
Naidu 1992).
The third principle takes shape in the search for the final reality which, in
the Hindu view, cannot be understood through rational means, and has neither
shape nor name. This way of thinking encourages individuals to seek an
unattainable ideal, leading them to fantasize while not realizing these fantasies
in concrete terms.
Essentially, India still has a caste system, although it has been abolished
by the constitution. The caste system may be defined as a system that divides
society into a large number of hereditary groups that are distinct and linked
by three traits (Bougle 1927): separation in the matter of marriage and of
direct and indirect contact; division of labour, and hierarchy, which orders
groups into superior and inferior.
Indian society is traditionally organized in four varnasor classes (literally
“colours”) that, in descending hierarchical order, are Brahmins (priests),
Kshatriyas (kings and warriors), Vaishyas (merchants), and Shudras
(labourers). At the bottom are the so-called Harijans (untouchables), the
rejected at the margins of society.
However, over the last century, industrialization has brought changes to
the traditional caste system. Thanks to this, employment may be different
from what the caste would impose, especially for such “new jobs” as
programmer, pilot, airplane personnel, and so on (Dumont 1966).
Generally speaking, companies have opened their doors to all castes that
are ready to take advantage of the opportunities offered by a new type of work.
The lower castes, especially the Harijans, find it convenient to work in
industry in order to attain a higher social status.
India, like Japan and other nations in the Far East, has a collectivist culture,
but British domination created cultural contaminations, as a result of which
the original collectivist orientation was mitigated by the individualism
characteristic of the English-speaking world; India thus presents a high
propensity towards “in-group” collectivism. The group takes concrete shape
in the “extended family” (referred to as the “Indian joint family”), which is
much larger than Western-type families; often, the family is also the centre of
economic activity, possessing and managing companies.
“In-groups” may vary in size, from the family alone, to friends, to the
company for which one works. Collectivism is strong within groups but weak
between groups.
Unlike Japanese collectivism, Indian collectivism is combined with a large
dose of spiritualism that is expressed by a complex set of beliefs in gods and
goddesses, religious rituals, morality, and benevolence, with influences on the
Indian psyche that are clear and run deep (Roland 1988).
The superior offers affection, education, and blessing, which subordinates
reciprocate with loyalty, submission, and obedience. There is no resistance or
conflict. The less powerful seek guidance from those who lead them, and the
more powerful respond by defining the rules of the game (Sorrentini 2009).
A typical manifestation of this subordination to the leader is the great power
distance characterizing the Indian setting, which is clearly seen in Indian
family-run SMEs.
SMEs are led by the founder patriarch (Dutta 1997), a charismatic leader
with strong authority and power, or by the successor patriarch, generally the
eldest son, who should have more experience and leadership ability. Should
the eldest son not possess these abilities, the company may be guided by other
members of the “extended” family who possess clear and marked
management abilities, but the eldest son often retains presidency in name, if
not in action.
However, large companies are trying to assimilate the management
practices and governance systems of Western organizations: Indian
institutions and universities have formulated management courses to meet the
demand for qualified management personnel.
The success of these initiatives is found, for example, in Bangalore, a kind
of Indian Silicon Valley, where Western-educated Indian managers are able
to run and administer the Indian industrial structure following Western
principles.
In general, Indian companies, and especially family-run ones, seek
collaborations with foreign companies for three main reasons: technology
transfer; the use of foreign brands popular on the Indian market; and the need
to fund large-scale projects like infrastructure, for example.
The simplest way to introduce a foreign technology or product onto the
Indian market is to sign a licensing agreement with an Indian company acting
as intermediary.
Indian companies prefer the foreign partner to hold a stake in the
company’s capital, even in sectors in which there does not appear to be an
overriding need to obtain financial resources: the foreign company’s
participation in the capital is held to bear witness to its greater interest in the
success of the initiatives that are undertaken (Dutta 1997).
A danger in the joint ventures with a strong involvement of family
companies is that its operation is slower. This is due to the fact that the
95 Index
managers’ power is quite limited, since they must continuously ascertain what
the family thinks, in addition to the foreign company. The company’s
everyday management is therefore left to a family member, typically the
patriarch or an elderly member. Professional executives, in fact, have the
technical skills to run the company, but are often ill at ease in relations with
the family (Parikh 2001).
Therefore, almost all foreign companies operating in the country have
begun to operate through joint ventures or other types of strategic alliances,
and only once knowledge suited to the market has been acquired have they
begun to directly control the local companies, in order to avoid problems
derived from joint ventures with Indian families.
Indian companies have had strong exposure to Western models, and can
therefore understand their partners better than takes place in other Asian
cultures. For their part, Western companies are not as used to Indian models,
or to India’s market, its rules, and its legal model. Moreover, Western
companies rarely know their partner well, also due to the families’ lack of
transparency. Consequently, they are unable to understand the reasons why a
joint venture can be very slow.
As for initiatives undertaken by Indian companies on foreign markets, the
values associated with the traditional entrepreneurial Indian family are also
present in Indian families living broad. The success of Ispat and the Mittal
family (owners of many steelworks worldwide) and of other families, similar
to the success of certain communities like the Patels in the United States (the
Patel community owns 40% of American motels), may be taken as an example
of the success that has been achieved. The ability to operate successfully on
an international level has also been informally recognized by some British
banks, like Lloyds and Midland, which offer loans to Indian businesses based
on guarantees offered by the community, as recognition of the power of the
viridari (family networks).
An industrialized and technologically advanced Indian area is Bangalore,
which, especially in ICT, welcomes companies from the United States,
Europe, Japan, and, in recent years, from China as well.
The market structure presents small- and medium-sized enterprises led by
engineer/managers, who through spin-off processes—after some experiences
in large companies, and knowledge accumulated at universities and especially
those in the English-speaking world—have decided to create their own
business structures, driven by the passion for design and by an orientation
towards professional growth. The presence of skills concentrated in a given
area has brought a propulsive effect of progressive specialization, as well as
spillover effects related to the spread of technological knowledge. In the late
1990s, in addition to the expansion of American companies in Bangalore,
local software companies managed to break into the world markets by taking
advantage of the prices offered for these services by companies in Silicon
Valley.
The Indian government also made a positive contribution to Bangalore’s
development. Local authorities, firmly believing in the sector’s development
potential and in the possibility for SMEs to create positive externalities and
benefits for the whole country, have sought to facilitate the development of
local companies through the birth of real services in support of businesses:
the creation of institutes aimed at training young people with modern
education suited to the market’s demands; financial support through tax
breaks for smaller companies; and the supply of consulting for the marketing
of IT instruments.
The Many-Cultured Europe
To study the culture of European contexts, the area must be segmented into
individual countries and, often, into sub-areas. In Italy’s case, the chief
obstacle to collaborative relations with partners—not only international, but
in the domestic setting as well—is the owner/entrepreneur’s unwillingness to
renounce decision-making power or to delegate authority and functions, thus
going against the principles at the very basis of an inter-company alliance that,
as is known, always involves partial losses of control over one’s business.
The short-term perspective, the sometimes conflicting presence of
different cultural groups, an emphasis on individualism, and an atomistic
vision of the systems characterizing the small- and medium-sized enterprises
of certain Italian sub-areas (Calvelli 1990) lead to the belief that these settings
cannot be fertile terrain for developing an entrepreneurial mentality aimed at
voluntarily adopting cultural diversities. It may also be thought that a change
in behaviour and beliefs might be achievable when players in the context, or
cultural grafts from the outside, are able to coordinate diversities and
elaborate convergences of goals towards developing initiatives on the one although transforming itself under the impact of technological innovation, can
hand, while on the other hand showing companies the usefulness of the in turn orient, select, model, and promote the creation, spread, and
initiatives to be undertaken, in terms of economic returns and improved development of technological applications. On the other hand, since a nation’s
competitive advantages. culture is to be understood as the product of the cultures of the organizations
Conversely, German companies, which have created a capitalist model included in it, the existence may be thought to exist of a technological
similar to the Japanese, defined by Albert (1993) as “Rhine capitalism,” show paradigm in which the technical dimension takes shape with the combined
cultural behaviour closer to the Japanese world, especially in the relationships contribution of economic, institutional, and cultural factors. If this paradigm
established between companies and the domestic market. As to the parameters is accepted, one may agree with the thesis that Fordist enterprise has entered
determining collaborative choices with international partners, German into a crisis because the various prerequisites—not so much technological but
companies differ partially from Japanese ones, since the company/market above all economic, social, and cultural—upon which its effectiveness was
relationship is influenced by the orientation of both supply and demand based no longer exist (Reyneri 1988).
towards the product’s technical quality. The cultural variable is not extraneous to the processes of innovation and
Orientation towards the product’s technical quality—which, when spread the spread of technology, and this is also made clear when analysing Japanese
to society as a whole, is an aggregating variable that reinforces the spirit of technological success. Japan is a very small country, poor in natural resources,
belonging to the group—has for some time been the factor that, more than and highly dependent on an outside supply of raw materials. Structural
others, has been the mark of German companies. An orientation of this kind explanations alone appear insufficient for understanding Japan’s economic
is fostered by the sophistication of domestic demand which, upon coming into development, while interpretations emphasizing the cultural templates of
contact with a supply that is, per se, oriented towards the product’s technical Japanese society itself appear more sound (Sako and Dore 1988).
quality, ends up generating a circular relationship resulting in the progressive
increase of the technical content of the products that are made.
In Germany, innovative development is strongly supported not only by an
efficient school system but also by the presence of concrete structures
spurring innovation and R&D, such as the regional technological agencies
coordinated by Karlsruhe’s Fraunhofer Institute; these are tasked with
offering new businesses broad scientific and technical consulting, and a series
of financial facilities for innovative research (subsidies for R&D personnel,
industrial research associations, and consulting services).
German companies’ orientation towards technical quality, like the trust
that is characteristic of Japanese companies, appears to be a factor that can
actually hinder the growth of collaborative relationships with companies from
culturally distant countries. Here, once again, the culture of a given setting
plays a clear role, when that culture is considered in its interactive relationship
with other determinants of a country’s economic development. Culture,