Global Strategic Management

Nguyễn Hiệp – The University of Danang, University of Economics

Chapter 3

Global Strategic Development

3.1. Managing the Internationalization

Process

1
 Learning Outcomes

After this lecture you should be able to:

• Understand the motives for internationalization
• Apply the theories underpinning the internationalization
process
• Explain the Psychic Distance and Born Global concepts
• Advise a multinational firm on choosing an appropriate
entry mode for internationalization
• Advise a multinational firm on de-internationalization

3.1.1. Why Firms Internationalize

• Internationalization stimuli are those internal and

external factors that influence a firm’s decision to
initiate, develop, and sustain international business
activities.
• Two sets of factors lead firms to consider the
possibility of operating outside their home market:
organizational factors arising from within the
organization and environmental factors which are
outside the organization’s control.

Factors behind the decision to

internationalize

2
 Organizational Factors

• Decision-maker characteristics: Recognition of

the importance of international activities
+ Foreign travel and experience abroad
+ Foreign language proficiency
+ Background
+ Personal characteristics
• Firm-specific factors:
+ Firm size
+ International appeal

Environmental Factors

• Unsolicited proposals
+ From different sources (governments,
distributors, clients etc.)
+ In various ways
• The “bandwagon” effect : Firms imitate the
internationalizing firm’s strategic move to expand
overseas
• Attractiveness of the host country

Motives for Foreign Investment

• Why would a company want to invest in a foreign

location, given that it is risky and involves high
commitment of resources?
• According to John Dunning, there are four
motives for establishing a foreign investment:
1. Natural resource seeking
2. Market seeking
3. Efficiency seeking
4. Strategic asset seeking

3
 3.1.2. When and How to Internationalize
(internationalization process)

• When a firm is approached by a customer

• When competing firms enter an important market
• When a market is growing very fast
• When a firm has some strategic reasons
First mover advantages and disadvantages: five genetic
advantages
Cost advantages ; Pre-emption of geographic space;
Technological advantages; Differentiation advantages;
Political advantages

Obstacles to Internationalization:
Objective Reasons
Difficulties of internationalizing firms can be the result of at
least four different types of “liabilities”:
1. liability of foreigness: difficulties as a result of different
norms and rules that constrain human behaviour
2. liability of expansion: difficulties as a result of an
increase in the scale of a firm’s activities
3. liability of smallness: difficulties as a result of small
company size
4. liability of newness: difficulties as a result of being new
to a market

Obstacles to Internationalization:
Subjective Reasons

• Subjective perceptions of managers about foreign

markets are often the key reasons why companies
do not expand or decide to expand internationally
in a certain direction.
• Managers do not like uncertainty and they
normally prefer to invest in markets they are
familiar with rather than in unfamiliar markets.
• The concept of ‘Psychic Distance’ helps to
understand why managerial perceptions affect the
internationalization process of firms.

4
 Psychic distance

• Psychic distance can be defined as the distance

that is perceived to exist between characteristics of
a firm’s home country and a foreign country with
which that firm is, or is contemplating, doing
business or investing.
• High psychic distance (that is, subjective
perceptions of large differences between
countries) can discourage the firm’s international
expansion into a given country because it
generates uncertainties among business decision-
makers.

How to Expand Internationally:

the Uppsala Model
• The Uppsala Model suggests that a firm’s
international expansion is a gradual process
dependent on experiential knowledge and
incremental steps.
• It assumes that firms proceed along the
internationalization path in the form of logical steps,
based on the gradual acquisition and use of
information gathered from foreign markets and
operations, which determine successively greater
levels of market commitment to more international
business activities.

The Uppsala Model

5
 How to Expand Internationally:
the Born Global Firm
• Born Global Firms are firms which do not follow
the traditional internationalization process at all,
but which are multinational firms from the very
start.
• Characteristics of Born Global Firms: A born
global firm has virtually no domestic market,
internationalises within a short period from
inception, and generates most of its sales in
foreign markets.

3.1.3. Entry Mode Strategies

• Exporting
• Licensing
• Franchising
• Wholly-Owned Venture
– The Greenfield Strategy
– The Mergers and Acquisitions (M&As)
• Strategic alliance

Exporting
• Exporting is the action by the firm to send produced goods
and services from the home country to other countries.
• Risks:
– When countries experience major political instability,
export could be disrupted and could result in delays and
other defaults on payments, exchange transfer
blockages, or confiscation of property.
– The multinational firm has no control over some costs
such as costs of land transport to the port, transfers,
shipping costs, insurance and foreign exchange risk.

6
 Advantages and Disadvantages of Exporting

Mode of Advantages Disadvantages

Entry
Export  Does not require a high
resource commitment in the
targeted country
 Inexpensive way to gain
experiential knowledge in
foreign markets
 Hard to control operations
abroad
 Provides very small
experiential knowledge in
foreign markets

 Low cost strategy to expand

sales in order to achieve
economies of scale

International Licensing
• “The transfer of patented information and trademarks,
information and know-how, including specifications,
written documents, computer programmes, and so forth, as
well as information needed to sell a product or service,
with respect to a physical territory”.
• Risks:
– Sub-optimal choice
– Risk of opportunism
– Quality risks
– Production risks
– Payment risks
– Contract enforcement risk
– Marketing control risk

Advantages and Disadvantages of Licensing

Licensing  Speedy entry to foreign  Hard to monitor

market
 Does not require a high
resource commitment in
the targeted country
 Can be used as a step
towards a more committed
mode of entry
 Low cost strategy to
expand sales in order to
achieve economies of
scale.
partners in foreign
markets
 High potential for
opportunism
 Hard to enforce
agreements
 Provides a small
experiential knowledge
in foreign markets

7
 International Franchising
• International franchising is “a contract-based organisational
structure for entering new markets”. A franchisor firm
undertakes to transfer a business concept that it has
developed, with corresponding operational guidelines, to
non-domestic parties for a fee.
• Risks:
– Master franchiser does not follow directives of the franchisor.
– Franchisees may not understand the fundamental concept of the
franchisor.
– Potential risk of free-ride.
– A franchise may damage the franchisor image and reputation in the
host country.

Advantages and Disadvantages of International

Franchising

International  Speed entry to foreign market  High monitoring costs

Franchising
 Requires a moderate resource  High potential for
commitment in the targeted opportunism
country
 Could damage the firm’s
 Moderate cost strategy to reputations and image
expand sales in order to
 Does not provide first
achieve economies of scale.
hand experiential knowledge
in foreign markets

Wholly Owned Ventures

• Multinational firms have two options: Greenfield -

investment in a completely new facility-, or acquire or
merge with an already established local firm.
• A greenfield strategy entails building an entirely new
subsidiary in a foreign country from scratch to enable
foreign sale and or production.
• An international merger or acquisition is a transaction that
combines two companies from different countries to
establish a new legal entity.

8
 Greenfield strategy

• Risks:
– The risk of building relationships with customers,
suppliers and government officials in the new country.
– The risk of recruiting managers and employees familiar
with local market conditions.
– The risk of being seen as a foreign firm by local
stakeholders.

Advantages and Disadvantages of Greenfield

strategy

Greenfield  Low risks of technology  Could not rely on pre-

strategy appropriation
 Able to control operations abroad
 Provides high experiential
knowledge in foreign markets
 Low level of conflict between the
subsidiary and the parent firm
 Does not have a problem of
integrating different cultures,
structures, procedures and
technologies
 Managers of foreign subsidiaries
have a strong attachment to the
parent firm
existing relationships with
customers, suppliers and
government officials
 Potential difficulty in
accessing to existing
managers and employees
familiar with local market
conditions
 Adds extra capacity to the
existing market
 The firm is seen as a
foreign firm by local
stakeholders

Mergers and Acquisitions (M&As)

• Types of M&As:
– Horizontal M&As: involve two competing firms in the
same industry
– Vertical M&As : involve a merger between firms in the
supply chain.
– Conglomerate M&As: involve a merger of two
companies from two unrelated industries.
• Risks:
– Corporate and national cultures fit
– Managers of the acquired foreign subsidiary may not
accept the parent company

9
 Advantages and Disadvantages of M&As

Mergers and  Low risks of technology  Problem of integrating

Acquisitions appropriation foreign subsidiaries into
 Able to control operations the parent’s system
abroad  Managers of acquired
 Provides high experiential foreign subsidiaries may
knowledge in foreign markets have a weak attachment
to the parent firm
 Could rely on pre-existing
relationships with customers,
suppliers and government
officials
 Access to existing managers
and employees familiar with
local market conditions
 Does not add extra capacity to
the market

3.1.4. De-internationalization

• De-internationalization refers to ‘any voluntary or forced

actions that reduce a company’s engagement in or
exposure to current cross-border activities’.
• De-internationalization can involve total or partial
withdrawal of a firm from an operational presence in a
foreign country or region.
• The decision to de-internationalise can be the result of two
different processes:
– company failure (a forced process), or
– strategic decision-making (a voluntary process)

10