Thursday, Oct. 19th
International Theories
Why go international?
• Economy-based explanations
– International product life-cycle theory
– OLI theory
• Management-based explanations
– The behavioral approach
– The strategic approach
International Product Life-Cycle
Theory
• 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
Product Life-Cycle
Sales
Goal:
extend the
life cycle as
long as
possible
Time
International Product Life-Cycle
1st phase Launch/Growth
2nd phase Maturity
3rd phase Decline
Factor explaining
internationalization
phase
Technological
advantage
Competitors
in foreign
markets
Search for
least
expensive
sources of
supply
Internationalization
phase
Export
Production
abroad
Production
abroad, export
to domestic
market
Key variable in
marketing mix
Limits to this theory
• 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…
OLI Theory
•
•
•
•
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)
OLI Theory
INTERNATIONAL STRATEGY
Limits to this theory
• 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
The Behavioral Approach
• 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
Relationships found by the
behavioral approach
• 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,
open-mindeness, study abroad…)
The Strategic Approach
• 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
The Strategic Approach
Determining Factors of Internationalization
• Commercial Factors
– Market saturation and/or
size
– Degree of specialization
– Seasonal sales
• Industrial Factors
– Search for leverage
– Search for scale
economies
– Reduced labor costs
• Environmental Factors
– Open markets and freetrade agreements
– Converging
tastes/preferences
– Government aid
• Opportunity Factors
– Spontaneous meeting (trade
fairs, word-of-mouth)
– Production surplus
– Management motivation
Comprehensive, global approach to explaining internationalization
Major Internationalization Motivations
of Small and Medium-Sized Firms
• 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
The Internationalization Process
There are 3 essential characteristics of
internationalization:
• Internationalization is universal
• Internationalization is heterogeneous
• Internationalization is sequential
Internationalization is universal
• 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
Internationalization is
heterogeneous
• 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)
Internationalization is sequential
• 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)
Internationalization and distance
• ___________ distance
• __________ distance
• ___________ distance
CONCENTRIC EXPANSION
Concentric Expansion
Cold countries
Hot countries
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Thursday, Oct. 19th - Appalachian State University