Theories of internationalization

In the literature, the process of internationalization has been encapsulated in various ways by three contrasting schools of research thought; FDI theory, the 'Stage' models and by the network perspective on internationalization. Of these, FDI and the stage models have received the most attention in the literature, while the network perspective is the most recent, and increasingly the most popular, approach.

In all the schools of thought the explanation, both conceptual and empirical, is mainly in the context of larger multinational, manufacturing companies. Since small firms, for all sorts of reasons, experience different management practices compared with larger firms, then it is likely that their experience of internationalization will also be different. This issue will be explored further in the next chapter but, for now, this chapter will concentrate on the theories themselves.

Foreign direct investment

Many governments around the world have established special bodies to attract foreign investment (see Boxes 4.1 and 4.2). In today's world this is a highly competitive field, with much wooing of potential investors by offering attractive incentives, including tax breaks and rent-free periods. The key benefit to the host country is the influx of jobs and the hoped-for impact on suppliers to a new plant. The economy is diversified, imports often reduced, and new technologies are introduced to the economy.

There is, however, a down-side to this activity in that many promises are not fully realized in terms of the number or types of jobs created, i.e. assembly rather than R&D or higher level management jobs. Traditionally, these so-called branch plants are also vulnerable in times of economic downturn. Many vulnerable communities around the world have welcomed much needed jobs, only to see them evaporate as quickly as they came. Despite this, efforts to attract investment continue unabated.

The theory of FDI has developed from neo-classical and industrial trade theory, and supports 'internalization' of a firm's activities in the process of internationalization. This view explains international expansion behaviour with the argument that firms choose their optimal structure for each stage of production by evaluating the costs of economic transactions. From this, firms choose the organizational form and location for which overall transaction costs are minimized. Thus, transactions which are perceived to be high risk and requiring significant management time or other resource commitments are more likely to be 'internalized,' as part of a hierarchically structured organization. Conversely, transactions with limited investment requirements and less risk are more likely to take place between firms, and across market boundaries, and are therefore 'externalized/

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Critics of FDI argue that research in the area is used primarily to explain a pattern of investment, and not a long-term process of internationalization (Melin, 1992). Aharoni (1966) views FDI, in the context of small firms, as a managerial decisionmaking process. This study of US investors in Israel identified five stages of activity which characterize the FDI decision process:

1. An 'initiating force' which triggers a non-investor

2. Investigation

3. The decision to invest (involving increased commitment within the firm)

4. Review and negotiation within the firm

5. Organizational change 'through repetition' over time.

The interviews of Buckley et al. (1990) with managers of UK manufacturing firms also suggest an evolutionary approach to internationalization, reflecting incremental investment resulting from a process of managerial learning over time. Thus, FDI, as we shall see in the next section, exhibits characteristics similar to those associated with the stages approach.

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Stage models

The stage models are based on the premise that internationalization is a process. It is viewed as an evolutionary development over time and consists of a number of phases. Typically the models follow the following generic phases:

1. No interest in exporting

2. Exporting begins via intermediaries

3. The firm begins to export more directly and enthusiastically

4. The firm may establish a presence in the export market in the form of a marketing or sales outlet

5. Finally, at the most advanced point, a manufacturing plant is established.

Two concepts strongly associated with the models are psychic distance and geographic proximity. Psychic distance refers to the tendency for those people involved in first time exporting to trade with countries with which they feel comfortable culturally. So, for example, English speaking nations will be more likely to trade with each other initially, even if the geographic distance is greater than their nearest neighbour. The issue of geographic distance is straightforward in that the initial exporting will take place to countries in close proximity. Both concepts work together to influence the destination of the first export order.

A number of models have been proposed along these lines and, rather like the definition issue, they are variations on a theme rather than radically different, as Table 4.1 illustrates.

The models draw on organizational behaviour and learning theory to capture both firm behaviour and managerial learning over time (see Box 4.3). Much of the conceptual and empirical foundation in this school of research was initiated by Johanson and Wiedersheim-Paul (1975), and then Johanson and Vahlne (1977), whose establishment chain model suggests that internationalization activities occur incrementally, and are influenced by increased market knowledge and commitment.

The basic theory is that the perceptions and beliefs of managers both influence, i f 'iri.1: ,-¡. ■ ■ i ■

Table 4,1 Content review of export development models. Source: Leonidou and Katsikeas (1996)


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