Internationalization Intent Model
by
Mustafa Burak Guclu
IBA8010-S1-SP-2009
Dr. Louise Kelly
ABSRACT
The study contributes to the existing research by exploring how firms choose the right level of
intent in relation to business environments of foreign markets. Potential determinants are derived
from traditional internationalization process theory as well as more recent literature on
knowledge management; including the resource-based view. Building upon these literature
streams a conceptual model and specific propositions are developed concerning the pattern and
progression of knowledge and resources development within the foreign markets. I discuss
implications of the proposed conceptual model for both research and managerial practice.
1
INTRODUCTION
Internationalization theories study the nature and determinants of the process by which
companies develop international operations (Buckley and Ghauri 1993; Welch and Luostarinen
1988; Cavusgil 1984; Johanson and Vahlne 1977). According to internationalization process
model, firms learn new foreign market knowledge incrementally through the commitment of
resources to do business in specific markets. Foreign market knowledge furthermore affects how
current activities are accomplished (Ling-Yee, 2004). The learning process was found to be
critical important particularly that has grown from the actual experience of internationalization,
resulting in experiential knowledge (Johanson and Vahlne, 1977).
Previous studies on internationalization process have underlined experiential knowledge leading
to organization’s performance but ignored different forms and level of market knowledge in an
organization’s knowledge base, and the influence of this knowledge in the development and
exploitation of organization capabilities (Maheran, Mohammad & Mohammad). There is also
very limited attention on the link between “internationalization theories”, knowledge-based view
theory and other strategic theories at both the conceptual and practical level (Welch and Welch,
1996).
In this study I use knowledge management theory for examining a firm’s tendency to invest in
future foreign market activities. Whereas prior research has often emphasized a firm’s degree of
internationalization as its level of export, De Clercq, Sapienza, and Crijin (2005) defines
“internationalization intent” as a firm’s propensity to expand its cross-border activities in terms
of the intensity (for example, level of export) and the scope (for example, number of countries to
2
which the firm exports) of such activities. The contribution of the study lies in creating a
measure for market knowledge gap versus resource commitment gap as an antecedent of
internationalization intent. This includes activities aimed at exploiting existing knowledge and
resources compared to exploring new knowledge and resources with regard to domestic and
foreign markets.
3
THEORATICAL BACKGROUND
This paper builds upon three major theoretical streams: internationalization, knowledge
management, resource-based view.
Internationalization
Extensive interest in the internationalization process of firms has escalated many different
approaches and models to try to explain how firms enter foreign markets. There are a variety of
models in the field of internationalization, both descriptive e.g., the Network model and
predictive e.g., the Uppsala model, as well as static and dynamic (Hansson, Sundell & Öhman,
2004).
In the Network model the long-term relationships between business actors in an industry and the
context in which the firm operates have the explanatory value when the model describes the
internationalization of firms It is assumed in the model that the network, in which the firm is
active, is the main driving force of the internationalization. All the actors in a network are
interdependent and interact with each other in one way or another. This enables the firm to have
a high degree of internationalization without a high degree of assets in a specific foreign market.
A basic assumption in the model is that a firm is dependent on other firms’ resources within the
network (Hansson, Sundell & Öhman, 2004).
The Uppsala model has its theoretical base in the behavioral theory of the firm (Cyert & March,
1963; Aharoni, 1966). It is also influenced by Penrose´s theory of the growth of the firm
(Penrose, 1995). The behavioral theory describes the internationalization of the firm as a process
4
in which the firm gradually increases its international involvement, and this is expressed in the
Uppsala model through psychic distance and the establishment chain (Hansson, Sundell &
Öhman, 2004). The process develops through the exchange between the development of
knowledge about the foreign markets and operations, and an increasing commitment of resources
to those markets (Johanson & Vahlne, 1990). The central issues of the model are how
organizations learn and how their learning affects their investment behavior (Forsgren, 2002).
Another important aspect of the Uppsala model is that it is a dynamic model, describing the
internationalization of a firm as a process (Hansson, Sundell & Öhman, 2004) .
Knowledge Management Strategy
Zack (1999) defines knowledge management as “purposefully and systematically enhancing and
exploiting the intellectual resources available to an organization, to increase the firm's value. To
understand how the firm builds long-term value, the place to look is its competitive strategy. If
knowledge management programs are to build lasting value, they must directly support the
competitive strategy of the organization”.
It is more important for a firm to find new and better ways to combine traditional resources
rather than having unique resources, because it is harder to imitate tacit knowledge that is
developed through experience and embedded in specific business activities and processes. If the
company knows more than its competitors, it will have the opportunity to stay in the lead.
Therefore, the firm should evaluate opportunities to develop and add to what it knows, while
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easing the threat of trying to compete with less knowledge compared to its competitors (Zack,
1999).
Resource-based View
Resource-based theory treats firms as potential creators of value-added capabilities, and the
underlying organizational competences involve viewing the assets and resources of the firm from
a knowledge-based perspective (Prahalad and Hamel, 1990;). It focuses on the idea of costly-tocopy attributes of the firm as sources of business returns and the means to achieve superior
performance and competitive advantage (Halawi, Aronson & McCarthy, 2005).
A firm’s resources consist of all assets both tangible and intangible, human and nonhuman that
are possessed or controlled by the firm and that permit it to devise and apply value-enhancing
strategies (Barney,1991; Wernerfelt,1984). Resources and capabilities that are valuable,
uncommon, poorly imitable and non-substitutable (Barney, 1991) comprise the firm’s unique or
core competencies (Prahalad and Hamel, 1990) and therefore present a lasting competitive
advantage. Intangible resources are more likely than tangible resources to generate competitive
advantage. Especially, intangible firm-specific resources such as knowledge permit firms to add
up value to incoming factors of production (Halawi, Aronson & McCarthy, 2005). Such
advantage is developed over time and cannot easily be imitated. Barney (1991) regards resources
as those controlled by a firm that allow the firm to formulate and implement strategies that
expand its efficiency and effectiveness. According to his VRIO framework, resources like value
creation for the customers, rarity compared to the competition, inimitability, and organization
would present sustainable competitive advantage (Halawi, Aronson & McCarthy, 2005).
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Figure 1: Internationalization Intent Model
Mentality Filters
Awareness
Market
Commitment Gap
Knowledge
Gap
Level of Internationalization Intent
Export
International
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Multinational
Managerial Mentality Filter
The top management team members can play a critical role in shaping firm-level responses to
discontinuities like international markets (Kaplan, Murray and Henderson 2003) Managers
encounter either success or failure, when they face environmental stimuli. Over the years, their
experience evolves into a success model consisting of ‘things that work’ and ‘things that do not
work’ and they use such models in their daily decision-making. However, these models are valid
as long as the environment remains unchanged. As the environment undergoes a market change,
managers’ historical success models become a major obstacle to firm’s adaptation to new reality
(Ansoff, 1990)
The most famous example of failure to recognize imminent discontinuity is Henry Ford’s
rejection to admit the end of the single model automotive era. The manager filters the novel
changes that are not relevant to his historical experience, and therefore ignores the shape of the
new environment. Ansoff refers this as ‘mentality filter’.
In international markets, managers face several challenges:
The Cognitive Challenge
The manager should be free of refusal, nostalgia and arrogance. He should have no emotional or
intellectual investment in history or the future. He must be intensely conscious about what has
changed in the market and how these changes are likely to shape the new market. (Ansoff, 1990;
Hamel, 2003)
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The Creative Challenge
The manager should look for alternatives as well as awareness. He must create a set of new
options as forceful alternatives to dying strategies. He should not only perceive the underlying
trends that will make the future different from the past, but also make novel examinations of
historical trends and create new strategies. (Ansoff, 1999; Hamel, 2003)
Power Challenge
Managers should not feel threatened with a discontinuity, try to minimize or refuse to recognize
the impact of discontinuity to the firm. He must have the power to assure the acceptance of
change. Recognizing the mentality of others makes an important contribution to the success of
the firm. (Ansoff, 1999; Hamel, 2003)
Entrepreneurial Challenge
Managers should have vision of new future for the firm. Achieving this, he should be tolerant to
failure. He should experiment a portfolio of new strategies, and a one-time failure should not
deter the manager from trying again. (Ansoff, 1999; Hamel, 2003)
Proposition1: Managerial mental challenges have a negative relationship with
awareness of the international market.
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AWARENESS
After managerial mentality filter, the earliest possible response to new market environment
should be awareness strategies. Firms gather their basic awareness through methods like
economic forecasting, sales forecasting or competitive analysis, but these measures are most
often extrapolative and do not provide information about strategic discontinuities. Starting the
awareness activities does not require concrete information about threats and opportunities.
(Ansoff, 1990)
External Environmental Scanning
Choo (1999) defines environmental scanning as “the acquisition and use of information about
events, trends, and relationships in an organization's external environment, the knowledge of
which would assist management in planning the organization's future course of action”. Its
concentration is on the recognition of emerging issues, situations, and potential pitfalls that may
influence an organization's future in the international market (Albright 2004).
Environmental scanning works as an early warning system to identify potential threats and
opportunities to the organization (Albright 2004). Managers can better identify external changes
through environmental scanning. The information gathered help managers make strategic
decisions about new resource needs and capability development efforts to address these changes
(Kor, Mahoney and Pettus 2007). The process assumes that potential impacts on the organization
may come from unpredictable and uncontrollable sources. Thus, environmental scanning is
closely linked to strategic planning (Albright 2004).
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Also, environmental scanning corresponds to a key process of organizational learning because
organization's ability to adapt to international market depends on evaluating and understanding
the external changes (Choo 1999). Devotion of time and concentration of external monitoring is
required for external scanning as a planned learning activity (Winter 2000). It involves
engagement of new routines for not only managers but also for whole organization to scan
threats and opportunities in the international market in order to provide relevant information and
insights to decision makers. The organization should habitually be alert to environmental
changes and be efficient in distributing the vital external information among itself. Scanning as a
collective learning activity can surpass the scanning as a sole managerial responsibility (Kor,
Mahoney and Pettus 2007).
Internal Scanning
External scanning by itself is a not an enough condition for successful environmental adaptation.
Systematic internal scanning is also required before firm while identifying changing trends
within the international market (Kor, Mahoney and Pettus 2007). It is vital for the firms to
analyze their internal strengths and weaknesses during the strategy-making process (Barney
1991). In order to compete effectively in the international markets, internal processes such as
R&D, process improvements, and improvements in infrastructure should be redeveloped and
focused on identifying current weaknesses that need renewal the resource and capability bundle.
A firm will have a better chance of developing new resource configurations and market positions
that capitalizes on its unique strengths, if it can identify and evaluate its knowledge bases and
unique capabilities (Kor, Mahoney and Pettus 2007).
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Other factors to look at in internal scanning are routines and flexibility. Routines can play a
critical role in creating new resources and new capabilities (Grant1996). Routines allow the firm
to create value by changing the resource base to create, integrate, recombine, and release
resources (Eisenhardt and Martin 2000). They may also used by the firm to readjust its resource
base to adapt to changing market conditions (Zahra and George 2002). They can enable the firm
to maintain and renew its resource and capability bundles by creating new operating routines that
result in better resource applications and services. Also organizational capability routines help
the firm disregard the existing routines that are no longer valuable economically in the
international market environment (Kor, Mahoney and Pettus 2007).
International market environment requires that the firm unlearn some of the existing routines that
obstruct growth and strategic adaptation, and be replaced by new routines. The organization
needs to systematically and continuously learn, unlearn, and develop new operative routines that
results in superior value and resource productivity. This systematic rebuilding through emergent
or planned unlearning and learning efforts also enables the firm to become strategically flexible
(Kor, Mahoney and Pettus 2007).
Volberda (1998) suggests strategic flexibility when the organization confronts unfamiliar
changes that have broad consequences and needs to respond quickly. The issues and difficulties
relating to strategic flexibility are by definition unstructured and non-routine. The signals and
feedback received from the international environment tend to be indirect and open to multiple
interpretations. Because the organization usually has no exact experience and no routine answer
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to deal with the changes, management may have to change its game plans, dismantle its current
strategies, or apply new technologies.
According to Pasmore (1994), flexibility is embedded in the organization’s awareness,
anticipation and adaptability in attaining a competitive advantage under conditions of rapid
change. Drucker (1980) implies that business should be flexible enough to cope with
unanticipated threats and opportunities resulting from uncertain future and unstable environment.
Johnson (1992) emphasizes that flexibility is crucial quality as well as responsiveness for
organizational success. Volberda (1998) contends that the flexible firm encourages creativity,
innovation, and speed while maintaining coordination, focus and control.
Proposition2: Coherently intertwined external and internal scanning capabilities
increase the firm’s ability to identify its specific needs for choosing the level of
internationalization intent.
Market Knowledge Gap
The market knowledge concept consists of general knowledge and market-specific knowledge.
The general knowledge concerns marketing methods and common characteristics of certain types
of customers. Market-specific knowledge concerns characteristics of the specific national market
expressed as: "…its business climate, cultural patterns, structure of the market system, and, most
importantly, characteristics of the individual customer firms and their personnel.” (Johanson &
Vahlne, 1977)
13
Entering foreign markets is a knowledge development process, and the entrant firm may realize a
considerable market discrepancy, i.e. the firm identifies a gap between the knowledge possessed
and the knowledge needed for accomplishing the foreign business venture. Based on its strategic
knowledge and capabilities, the organization can identify extent to which it various categories of
knowledge are in alignment with its strategic requirements. Firm’s knowledge base is more
volatile in international markets due to the increase in size or variety of knowledge gap, so the
firm should either align its strategy with its capabilities or acquire the capabilities to execute its
strategy This knowledge gap also captures some of the notion of the liability of foreignness and
requires that the new local operation learn how to operate successfully and to fill the knowledge
gap in the local environment (Zaheer, 1995). Both internationalization process theory (Johanson
and Vahlne, 1977; Erramilli, 1991) and organizational learning theory (March, 1999) suggest a
perceived knowledge gap will stimulate managerial actions in order to close the knowledge gap.
In terms of market entry, it has been argued that firms need to acquire new knowledge to fill the
gap between their current capabilities and those needed to compete successfully in the new
market.
Resource Commitment Gap
According to Johanson & Vahlne, the market commitment concept is composed of two factors:
the amount of resources and the degree of commitment. The amount of resources is described as
the size of the investment that may include marketing, organization, personnel, and other areas.
The degree of commitment on the other hand becomes higher the more the resources are
14
integrated with other parts of the organization and when their value is derived from this
integration (Johanson & Vahlne, 1977, in Johanson & Associates, 1994). Described in different
words, the more difficult it is to find alternative uses for the resources in question and the more
specialized these resources are to a market, the higher the degree of commitment is.
The resource based view holds that as the degree of control increases, the firm’s chances of
success increases because the firm is able to deploy key resources essential to success (Isobe,
Makino and Montgomery 2000; Gatignon and Anderson 1988). These resources could be
intangible properties such as brand equity and marketing knowledge (Arnold 2004) or tangible
properties such as a patent or a process blueprint. Control over such properties allows a firm
freedom to deploy resources flexibly thus enhancing its chances of success.
Resource commitment describes the assets that cannot be redeployed to alternative use without
loss of value (Bell, 1996; Kim and Hwang 1992; p. 3). Resources commitment is closely linked
to control, as substantial financial and management commitment will increase control (Young et
al., 1989). Doz and Prahalad (1981; p. 5-6) conceptualize control as "the influence that a head
office has over subsidiaries concerning decisions that affect subsidiaries strategy" such as choice
of technology; definition of product market; emphasis on different product lines, allocation of
resources; expansion and diversification of the subsidiary operations; and a willingness to
participate in a global network of product flows among subsidiaries. They also define resource
commitment as technology, capital management, and access to markets (p. 5).
15
As well as the knowledge gap, the firm should identify a gap between the resources controlled
and the resources needed for accomplishing the foreign business venture. In the context of
emerging markets, resource control provides two key benefits. First, it safeguards key resources
from leakage, such as patent theft. Second, it allows internal operational control essential to a
firm’s success in emerging markets (Luo 2001). In addition a firm could control key
complementary resources such as access to local distribution channels which can be important to
its success in any country.
Market knowledge and resource commitment have a mutually inclusive relationship. The firm’s
resource commitment evolves in correspondence with the gradual narrowing of its knowledge
gap. Also, the other way around, the firm’s knowledge gap narrows with the increase in its
resource commitment. Hence,
Proposition3a: the greater the entrant firm’s commitment of resources to the foreign
market, the smaller is the knowledge gap.
Proposition3b: the greater the entrant firm’s knowledge of the foreign market, the
smaller is the resource commitment gap.
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LEVELS OF INTERNATIONALIZATION INTENT
Level of internationalization intent depends on the firm’s propensity to expand its cross-border
activities in terms of the intensity (for example, level of export) and the scope (for example,
number of countries to which the firm exports) of such activities. The firm can choose the level
of its internationalization intent by comparing its market knowledge gap and resource
commitment gap. Below, three strategies are proposed according to this comparison.
Export
When the firm’s market knowledge gap and resource commitment gap are both high, the most
appropriate internationalization intent will be exporting. Exporting is the most traditional and
well established form of operating in foreign markets. Exporting can be defined as the marketing
of goods produced in one country into another. The firm can either sell through agents or use a
local sales office. (Ansoff, 1990)
The advantages of exporting are: manufacturing is home based thus, so it is less risky than
overseas based; it gives an opportunity to "learn" overseas markets before investing in bricks and
mortar, and it reduces the potential risks of operating overseas. The major problem of exporting
is that of market knowledge. Control, or the lack of it, is a major problem which often results in
strategy decisions being in the hands of others.
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International
When the firm’s market knowledge gap and resource commitment gap become moderate, the the
firm can move into international status. At this stage, the firm follows a decentralization process
in which activities are progressively distributed among the countries in which the firm does
business. Some of the activities the firm possesses are local marketing, local production, local
R&D, and local diversification. (Ansoff, 1990)
International firms are not required to own only technical competitive advantages developed
back the home market, but can uncover and incorporate new capabilities from abroad. Meaning
that, the firm can enhance and leverage its existing capabilities through greater international
presence. Most resource and capability building through enhanced international market scope
must derive from access to new component knowledge. The firm can access strategic know-how
as well as the complementary resources, but these have to do with improving in a particular
market or market activity. The firm still lacks necessary knowledge and resources to compete
globally (Tallman & Fladmoe-Lindquist, 2002).
Multinational
Multinational level of internationalization requires both low market know market knowledge gap
and resource commitment gap. It involves an enlargement of the overall corporate perspective
and introduction of new relationships among parts of the firm. Some of the firm activities
involve global competition, global optimization of production, resources and R&D, global
diversification and global portfolio management. (Ansoff, 1990)
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According to the transnational model by Barlett and Ghoshal, the focus is on the firm rather than
the industry. Globalization leads to integrating strategic demands for worldwide efficiency, local
responsiveness and world-class technology across all markets. It also addresses the need for
organizational structure that is capable of controlling this integration without losing the unique
qualities of the firm (Tallman & Fladmoe-Lindquist, 2002).
The firm at the multinational level is able to decentralize operational responsibilities in
differentiated subsidiaries while supporting strong integration among all affiliates. It can spread
new technical capabilities throughout the worldwide market, exploiting new assets while they are
still unique. It can also take advantage of global flexibility, arbitrage possibilities and cost
optimization via the integration of resources and knowledge base (Tallman & FladmoeLindquist, 2002).
Strategic Alliances
If the firm’s market knowledge gap is low but resource commitment gap is high, or market
knowledge gap is high but resource commitment gap is low, the firm can choose strategic
alliances with foreign partners to close its gap in the foreign markets.
Strategic alliances can be appealing because of several factors. By joining forces in producing
components, assembling models, and marketing products, the firm can realize cost savings not
achievable within its own market. It can share distribution facilities and dealer networks in order
to strengthen its access to the customers. The firm can also fill the gaps in technical expertise,
knowledge of local markets and working relationships with key officials in the host country
government (Thompson, Gamble & Strickland, 2004).
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Figure 1. Internationalization Intent Level Grid
High
Strategic
Alliances
Export
Market
International
Knowledge
Gap
Multinational
Strategic
Alliances
Low
Low
Resource Commitment
Gap
20
High
CONCLUSION
In this study, I contribute to theories governing internationalization, knowledge management and
resource-based view in order to produce a theoretical model and a pragmatic road map for
selecting the right strategic intent for foreign markets. Knowledge management and resourcebased approaches observe the internationalization process of firms from considerably different
angles. While the knowledge management approach is mainly focusing on the company and its
environment, the central point of the resource-based approach is the control of resources within
the firm and its enhancement.
Traditional theories describing the internationalization process of firms, like the Uppsala model
state that firms first choose to enter nearby markets with low market commitment. Nevertheless,
this is not applicable to all firms. As the firm increases its international commitment, it faces a
greater uncertainty. Although acquiring knowledge about psychically distant markets or specific
information involved in foreign activities is costly, it remains potentially uncertainty reducing.
Consequently, the more accessible the knowledge of foreign market is, the lower the transaction
cost of operating on it can be.
This study suggests that firms can acquire knowledge about the foreign markets and assess its
resources and capabilities by internal and external scanning before entering to the foreign
markets. One important factor underlying the awareness of the firm is the managerial mental
challenges that may affect the perception of reality. Coherently intertwined and unbiased
21
external and internal scanning capabilities increase the firm’s ability to identify its specific gaps
for choosing the level of internationalization intent.
There are two gaps the firm needs to consider during the selection of the level of
internationalization intent. One is the market knowledge gap and the other in resource
commitment gap. These two are mutually inclusive. The firm’s resource commitment evolves in
correspondence with the gradual narrowing of its knowledge gap. According to the status of
these gaps, the study suggests several strategies for competing in the foreign markets.
Further empirical research is critical for helping determine the processes for eliminating the
managerial mental challenges, filling knowledge gaps and resource commitment gaps and the
factors influencing the international involvement.
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