Internationalization Theory
Internationalizing the Small and Medium Sized Firm – four cases
Since focus for the thesis is the process and perceived success factors of internationalization, less focus than usual will be put on the reasons for internationalization, choice of market and the choice of entry mode. They are still very relevant as the analysis will show and could therefore not be excluded.
Firms tend to internationalize for several reasons; too small home market, external initiatives to spread the product, built into the business concept, for personal reasons, out of coincidence etc. For a more thorough discussion on the matter of reasons for internationalization we refer to Mattson & Hertz (1998). Choice of market is usually done after thorough market research; these days a more simple task than it was some years ago, most numbers and facts about markets and countries are easily obtainable through the Internet or specialized research companies. To sum up, most authors (Kotler 1991 & 2001, Malhotra 1999 and several others) conclude that the choice of market should be influenced by the following factors; size of market, customer buying power, consumer preferences in the specific country and entry barriers. Other issues that might be of importance depending on where in the world the market entry will take place are based on cultural and language differences as well as political stability (Malhotra 1999). The existence of a working technical and distribution infrastructure can for most companies also be important aspects. When it comes to strategy for the international expansion it is usually the mode of entry that attracts the most interest and resources from the planning. The choices can be seen as a scale of rising commitment to the chosen market (Kotler 1991).
Figure 1. Entry modes to international markets (Kotler 1991)
Today many firms tend to jump very quickly through the stages, see remark about Born Globals for example. The firms in this study have all more or less jumped directly to step 5 and made a direct investment through setting up an office. As can be seen in Kotler’s model the profit potential rises, but so does the risk which will be seen in the analysis.
Ever since it first was developed by Johanson & Vahlne (1977), the Uppsala Internationalization Process Model1) has been widely used and recognized within the field of research on the internationalization process of the firm. Their basic argument is that firms tend to internationalize in small and incremental steps, due to uncertainty. During this time successive learning and development takes place. This cautious approach has been especially true for SME’s since they normally work with limited financial and managerial resources (Lindqvist 1991). Firms also tend to enter countries in an order where the ones with lesser psychic distances away from its own come first. This notion of distance refers to differences in for example culture between countries. The distance also makes it more difficult to acquire specific market knowledge.
Recent work done by Wolff & Pett (2000) suggest that there are two main theories dominating today, the stage-theory (Uppsala IP-model) or the International-at-founding (Oviatt and McDougal 1994), also by some authors referred to as Born-Globals (se above). However, Wolff and Pett (2000) address the question if there is no solution in between, which is something the authors also believe to be true.
Besides from the more recent work mentioned above, many authors have raised criticism against the model; see for example K. A. Nordström (1991) for a thorough description of this critique. In his doctoral thesis he joins this group of critics when he searches for new patterns and explanations of the internationalization process of the firm. Nordström’s major conclusions are that the internationalization pace seems to become more rapid than ever. He also finds indications of a trade-off between the pace on and the level of commitment to particular markets. Millington & Bayliss (1990) suggest that the incremental process that creates knowledge described by the Uppsala IP-model is being replaced by research and planning before internationalizing. This is also supported by Nordström (1991) who mentions the higher amount of information and how it enables leap-frogging through the internationalization process model presented by the Uppsala-researchers. He supports and further develops the notion of organizational learning and focus on experience depicted by the model.
One more often used and cited part of theoretical framework around internationalization processes is the work done by Mattson & Hertz (1998) as well as Johanson & Mattson (1988), who discusses the occurrence and importance of having international networks, since many small companies do not have infinite resources, and therefore network collaborations are seen as an important internationalization strategy for smaller companies. “The internationalization process is a cumulative process in which relationships are continually established, developed, maintained, and dissolved in order to achieve the objectives of the firm.” (Ahokangas 1998:43).
A central point in network theory is that different processes within a company cannot be explained without analyzing the networks that a company directly or indirectly is a part of. The roles of networks have attracted a lot of attention in the last decades. It is often said that having a good network is one of the keys for success. For an SME, both industrial and financial networks play an important role when internationalizing. An industrial network normally includes different players involved in production, distribution and usage of services and products (Johansson & Mattson 1988). Financial networks are often of importance for SME’s since these companies normally need to finance their expansion with external capital. In some cases it might be easier to find financing in the country of expansion instead of on the home market. This has to do with the fact that some venture capitalists prefer to invest in their own home region, where they have a better understanding of the market.
The degree of internationalization in a company’s network affects the specific company’s internationalization process. During the internationalization process a company can form new networks in three ways: by creating new relations to networks in the country of expansion that are prior unknown to the company, by creating new relations to actors in networks that are prior known to the company, or by using existing contacts in order to connect to new networks (Johanson & Mattson 1988).
