International Theories

• Economy-based explanations
– International product life-cycle theory
– OLI theory
• Management-based explanations
– The behavioral approach
– The strategic approach

• Developed by Vernon in the 1960s
• Explains the rise of the American MNC
• Basic principles:
– New products are created by firms in technologically advanced countries where marketing segments of clients with strong buying power exist
– These firms begin exporting to less-developed zones with high prices, to absorb initial costs
– In maturity phase, the technology becomes standardized and the monopoly advantage of the firm disappears
– The firm decides to relocate production to countries where labor costs are lower

Sales
Goal: extend the life cycle as long as possible
Time

1st phase -
Launch/Growth
2nd phase -
Maturity
3rd phase -
Decline
Key variable in marketing mix
Factor explaining internationalization phase
Internationalization phase
Technological advantage
Export
Competitors in foreign markets
Production abroad
Search for least expensive sources of supply
Production abroad, export to domestic market

• This cycle has not been observed in all parts of the world
• Innovation is spread throughout the world much more quickly today
• There are more and more new products competing on most markets
• International product life cycles have accelerated substantially
• Simultaneous product launches
• Pricing strategy has changed…

• Developed by Dunning in the 1980s
• The eclectic paradigm of internationalization
• Explains the choice FDI over exporting
• A firm will directly invest in a foreign market if three conditions are fulfilled:
– Ownership advantages (technology, patents, know-how, government protection, intangible assets and specific assets)
– Location advantages (economic conditions of producing and selling in a foreign market are important – natural resources, infrastructure, energy, labor costs, etc…)
– Internalization advantages (if transaction costs > organizational costs, the firm tends to internalize through
FDI)

INTERNATIONAL STRATEGY

• Only compares FDI and exporting
• Considered to be somewhat simplistic
• Does not take into account human and cultural factors
• Does not apply to service firms, only industrial firms
• Recent entry modes (such as franchising or licensing) give different results

• Research related to HR management
• Underscores the importance of managers in the internationalization process
• The manager’s behavior (or his decisionmaking process) is directly related to the internationalization process of the firm
• Stronger relationship in SMB

• First firms to internationalize are run by risktaking managers (vs. risk-averse)
• FDI will be the natural, spontaneous choice because headquarter management naturally prefers keeping control over international activities
• Market choice is subjective (education, creativity, openmindeness, study abroad…)

• Internationalization can allow a firm to meet general business goals
• It allows a firm to modify current competitive position
• It will cause management problems
(organizational structure, managing a multicultural team, control procedures, etc…)
• It requires specific techniques, such as international marketing, to overcome these problems

Determining Factors of Internationalization
• Commercial Factors
– Market saturation and/or size
– Degree of specialization
– Seasonal sales
• Environmental Factors
– Open markets and freetrade agreements
– Converging tastes/preferences
– Government aid • Industrial Factors
– Search for leverage
– Search for scale economies
– Reduced labor costs
• Opportunity Factors
– Spontaneous meeting (trade fairs, word-of-mouth)
– Production surplus
– Management motivation
Comprehensive, global approach to explaining internationalization

• PROACTIVE
– Profit advantage
– Unique products
– Technological advantage
– Exclusive information
– Managerial urge
– Tax benefit
– Economies of scale
• REACTIVE
– Competitive pressures
– Overproduction
– Declining domestic sales
– Excess capacity
– Saturated domestic market
– Proximity to customers and ports

There are 3 essential characteristics of internationalization:
• Internationalization is universal
• Internationalization is heterogeneous
• Internationalization is sequential

• In terms of geographic zones (country of origin and host country)
• In terms of firm size (small firms and MNCs)
• However:
– Concentration of large firms: about 250 French firms account for 50% of international trade, 30,000 account for 95%...
• But,
– more and more SMB are entering the international arena thanks to new technologies
– The export rate (export sales/domestic sales) or degree of internationalization is considered independent of firm size, so international commitment is as strong for small international firms as for large international firms

• In terms of entry modes
• In terms of internationalization vectors
– Country/market
– Market segments
– Products/services
Simple market expansion to total diversification
• In terms of business functions
– International sales (exporting, selling abroad)
– International sourcing/procurement (buying abroad)
– International production (manufacturing abroad)

• It is sequential in time
– Learning process (Uppsala Model of
Internationalization)
– Scandinavian Stages Model of
Internationalization
• It is sequential in space
– Concentric expansion
– Distance

The Uppsala Model of Internationalization
• The firm is a learning organization
• Internationalization is a series of steps in a learning process (learning about international environment and activities)
• The greater a firm’s international experience, the greater its commitment to foreign markets
• Knowledge and experience are directly related to the firm’s growing commitment
• Internationalization is not spontaneous, it is the gradual result of successive decisions
(evolutionary development of the firm)

• ___________ distance
• __________ distance
• ___________ distance
CONCENTRIC EXPANSION

Cold countries
Hot countries