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

Time

Sales

Goal: extend the

life cycle as long as possible

International Product Life-Cycle

1st phase - Launch/Growth

2nd phase - Maturity

3rd phase - Decline

Key variable in marketing mix

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

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 decision-making 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 risk-taking 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 multi-cultural team, control procedures, etc…)

• It requires specific techniques, such as international marketing, to overcome these problems

The Strategic ApproachDetermining 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 free-trade

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 ProcessThere 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

• In terms of business functions– International sales (exporting, selling abroad)– International sourcing/procurement (buying

abroad)– International production (manufacturing abroad)

Simple market expansion to total

diversification

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

Hot countries

Cold countries