THEORIES OF

INTERNATIONALIZATION
 Do Theories Matter???
• What is theory?
– A supposition or a system of ideas intended to explain something,
especially one based on general principles independent of the thing
to be explained.

• Internationalization theories?
1. Uppsala internationalization model/stages model of
internationalization
2. Dunning’s eclectic approach
3. The transaction cost analysis model
4. The network model
 Stages Model of Internationalisation
• A sequential pattern of entry into successive
foreign markets, coupled with a progressive
deepening of commitment to each market.

• The theory argues that firms proceed in a

stepwise fashion along some conceptual
continuum as they develop their international
activities.
 THE UPPSALA MODEL
No direct foreign marketing

Infrequent foreign
marketing

Regular foreign
marketing

International marketing

Global marketing
Welch and Loustarinen (1988) Extension
• Sales objects (what?):
o goods, services, know-how and systems;
• Operations methods (how?):
o agents, subsidiaries, licensing, franchising management contracts;
• Markets (where?):
o political/cultural/psychic/physical distance differences between markets;
• Organizational structure:
o export department, international division;
• Finance:
o availability of international finance sources to support the international activities;
• Personnel:
o international skills, experience and training.
 CRITICISMS OF UPPSALA MODEL

• Consistently cumulative and irreversible

• Model not valid for service industries
• Some firms leap-frog/skip some steps

Though the model is good for young and

inexperienced firms
 Dunning’s eclectic approach
According to Dunning the propensity of a firm to engage itself in international
production increases if the following three conditions are being satisfied

Ownership advantages: A firm that owns foreign production facilities has

bigger ownership advantages compared with firms of other nationalities. These
advantages’ may consist of intangible assets, such as know-how.
Locational advantages: It must be profitable for the firm to continue these
assets with factor endowments (labour, energy, materials, components,
transport and communication channels) in the foreign markets. If not, the
foreign markets would be served by exports.
Internalization advantages: It must be more profitable for the firm to use its
advantages rather than selling them, or the right to use them, to a foreign firm.
 THE TRANSACTION COST ANALYSIS MODEL
• This model argue that a firm will tend to expand until the cost of
organizing an extra transaction within the firm will become equal to the
cost of carrying out the same transaction by means of an exchange on the
open market.

• It is a theory which predicts that a firm will perform internally those

activities it can undertake at lower cost through establishing an internal
(‘hierarchical’) management control and implementation system while
relying on the market for activities in which independent outsiders (such
as export intermediaries, agents or distributors) have a cost advantage.
 THE NETWORK MODEL

• Business networks
o A mode of handling activity interdependences between several business
actors.
• The network model
o The relationships of a firm in a domestic network can be used as bridges to
other networks in other countries.
o A basic assumption in the network model is that the individual firm is
dependent on resources controlled by other firms.
o The character of the ties in a network is partly a matter of the firms involved.
This is primarily the case with technical, economic and legal ties.
 The relevance of the network model for the
SME serving as a subcontractor
• SMEs derive large % of sales from subcontracting
relations with LSEs
1. Power relationships
2. Control
3. Coordination and
4. Cooperation
 Born Globals
In recent years, research has identified an increasing number of
firms that certainly do not follow the traditional stages pattern in
their internationalization process. By contrast, they aim at
international markets, or possibly even the global market, right from
their birth

Born Global: a firm that from its inception pursues a vision of

becoming global and globalizes rapidly without any preceding long-
term domestic or internationalization period.
 Factors contributing to the rise
Factors giving rise to the emergence of born globals include:

1. Increasing role of niche markets

2. Advances in process/technology production
3. Flexibility of SMEs/born globals
4. Global networks
 INITIATION OF INTERNATIONALIZATION
Why go international/motives for internationalization?
Proactive motives Reactive motives

Profit and growth goals Competitive pressures

Managerial urge Domestic market: small and saturated
Technology competence/unique product Overproduction/excess capacity
Foreign market opportunities/market Unsolicited foreign orders
information
Economies of scale Extend sales of seasonal product
Tax benefits Proximity to international
customers/psychological distance
 TRIGGERS OF EXPORT INITIATION

Internal triggers External triggers

Perceptive management/personal Market demand
networks
Specific internal event Network partners
Importing as inward Competing firms
internationalization
Outside experts
 INTERNATIONALIZATION BARRIERS/RISKS
• Insufficient finances
• Insufficient knowledge
• Lack of foreign market connections
• Lack of export commitment
• Lack of capital to finance expansion into foreign markets
• Lack of productive capacity to dedicate to foreign markets
• Lack of foreign channels of distribution
• Management emphasis on developing domestic markets
• Cost escalation due to high export manufacturing, distribution and
financing expenditures
 Barriers hindering the further process of internationalization

• General market risks

Ø comparative market distance;
Ø competition from other firms in foreign markets;
Ø differences in product usage in foreign markets;
Ø language and cultural differences;
Ø difficulties in finding the right distributor in the foreign market;
Ø differences in product specifications in foreign markets;
Ø complexity of shipping services to overseas buyers.
 Commercial risks

• exchange rate fluctuations when contracts are made in a foreign

currency;
• failure of export customers to pay due to contract dispute, bankruptcy,
refusal to accept
• the product or fraud;
• delays and/or damage in the export shipment and distribution process;
• difficulties in obtaining export financing.
 Political risks
• foreign government restrictions;
• national export policy;
• foreign exchange controls imposed by host governments that limit the
opportunities for
• foreign customers to make payment;
• lack of governmental assistance in overcoming export barriers;
• lack of tax incentives for companies that export;
• high value of the domestic currency relative to those in export markets;
• high foreign tariffs on imported products;
The importance of these risks must not be overemphasized
and various risk management strategies are open to exporters.
These include:
• Avoid exporting to high risk countries.
• Diversify overseas markets and ensure that the firm is not
over dependent on any single country.
• Insure risks when possible. Gov’t schemes are particularly
attractive.
• Structure export business so that the buyer bears most of
the risk. (E.g. price in a hard currency and demand cash in
advance.