Internationalization

strategies
Incentive to internationalize

• There are many incentives to internationalize

• Firm must select its international strategy, entry mode
out of export, licensing, joint venture, acquisition or new
subsidiary
• Such international diversification can extend product life
cycle, incentives for innovation and produce above
average returns
• These are tempered by political and economic risks and
problems associated with managing a complex firm in
multiple countries
Identifying International Opportunities:
Incentives to Use an International Strategy
(IS)
• International Strategy (IS): firm sells its goods or
services outside the domestic market
• Reasons for an IS (motives)
– International markets yield potential new opportunities
– International diversification: innovation occurs in home-country
market, especially in an advanced economy, and demand for
product develops in other countries, so exports provided by
domestic organization- Life cycle extension
– Multinational strategy: To Secure needed resources
– Emerging Motives
– Other motives exist (i.e., pressure for global integration,
borderless demand for globally branded products)
– Global communication facilitates uniform life styles across
nations
– Through ease of assembly and lower costs IKEA has succeeded
to build brand in 44 countries across 300 stores
Identifying International Opportunities:
Incentives to Use an International Strategy
(IS) (Cont’d)

• Four primary Benefits

– 1. Increased market size
• Domestic market may lack the size to support efficient scale
manufacturing facilities
• Pharma companies had been doing significant FDI in
developed and emerging markets
• Cash rich Japanese firms invested $20 billion in cross border
acquisitions in 2008
• It is an incentive for firms who do not have adequate size of
domestic demand
• Pepsi and Coca Cola had been making investment in foreign
markets for quite some time now since the market growth in
USA has stabilized
• Chinese market for beverages is growing lot more faster than
USA
 • Size of the economy and availability of science and
technology affects the R&D decisions of MNCs
– 2. Return on Investment (ROI)
• Large investment projects may require global markets to
justify the capital outlays
• R&D intensive industries like in electronics are by nature
highly international industries,
• R&D investments are growing increasing the risk and product
becoming obsolete faster requires that investment needs to
be recouped quickly
• Companies like pharma need to internationalize to recoup the
huge R&D investment from international markets rather
quickly
• Weak patent protection in some countries implies that firms
should expand overseas rapidly in order to preempt imitators
Identifying International Opportunities:
Incentives to Use an International Strategy
(IS) (Cont’d)

• Four primary Benefits (Cont’d)

– 3. Economies of Scale and Learning

• Expanding size or scope of markets helps to achieve
economies of scale in manufacturing as well as marketing,
R&D, or distribution
• Economies of Scale are critical in auto industry
• China’s joining WTO has made China as an attractive market
because of removal of tariffs
• Ford, GM, Honda and Volkswagen all are producing economy
car in competition for Chinese local cars
• Chinese car manufacturers are also expanding abroad through
exports and acquisition
• Firms may also be able to exploit core competencies in
international markets by sharing resources and knowledge
between their units and their partners
 • This sharing generates synergy
• Also provides new learning
• Costs are spread over a larger sales base
• Profit per unit is increased
– 4. Location advantages: Low cost markets may…
• … aid in developing competitive advantage
• … achieve better access to critical resources:
– i.e., raw materials, lower cost labor, key customers, energy
– Cost of production and transportation can influence locational
advantage
– Other factors include culture.
– Liability of foreignness can be reduced in similar and closer regions
Determinants of National Advantage

Factors of
production

Firm strategy,
Demand
Structure, and
conditions
rivalry

Related and
Supporting
Industries
Porter’s Diamond
• The first dimension is the factors of production- inputs
required to compete-labor, land, natural resources,
capital and infrastructure (transportation, postal,
communication, highly educated workforce)
• Incidentally some countries develop specialized factors to
offset the basic factors
• South Korea lacks abundant natural resources but offer
strong work ethic, large number of engineers and
systems for manufacturing- makes it competitive
globally.
• The second dimension is the demand conditions. Nature
and size of buyers’ needs in home market for the
industry’s goods and services
• A large segment can produce the demand necessary to
create scale economies
 Diamond continues

• Related and supporting industries is the third dimension of porter’s

model.
• Italy has become the leader in shoe industry because its ‘leather
and leather processing machinery’ industry is well developed.
Design industry too is well developed supporting ski boots, fashion
apparel, and furniture
• In Japan, cameras , photo copiers and cartoons and animation
have created very successful video game industry
• Firm strategy, structure and rivalry is the fourth dimension which
varies form nation to nation
• Technical training system in Germany has effect on continuous
product and process improvement
• Cooperative and competitive systems in Japan has created cross
functional management of complex assembly operations
• The designing capabilities have impact on sports car, fashion
apparel and furniture in Italy
• In US competition in hardware and software industry has made
them competitive
In addition to 4 factors: Government policies

• Government policies play a role in competitiveness

of industries
• Chinese government provided incentives to
SunTech- solar energy-for European utilities
mainly due to low cost of production and
engineering talent in China
• Firm should create strategy by taking advantage
of country specific factors to be globally
competitive and must be given weightage when
deciding the business level strategy
• As the firm grows international it should learn to
adjust with the new markets and new
circumstances
India’s Diamond in Software
• International corporate-level strategy
Four basic corporate strategies are: international,
multi-domestic, global and transnational
– Home country usually most important source of
competitive advantage
• Resources and capabilities frequently allow firm to pursue
markets in other countries
Opposing Pressures and Four Strategies
International Corporate strategies )

1. International strategies

Pressure for both local adaptation and low costs are rather low

1. Different activities in the value chain have different optimal

locations

Susceptible to higher levels of currency and political risks

International Corporate strategies )

• 2. Multidomestic
– Decentralized strategic & operating decisions by
strategic business-unit (SBU) in each country allows
units to tailor products to local markets
– Focuses on variations of competition within each
country
– Consumer needs and desires, industry conditions( no.
and types of competitors)political and legal structure
and social norms vary by country
– Customized products to meet local customers’ specific
needs and preferences
– It increases the reach to customers thus increases
market share
– But there is less knowledge sharing across national
units
– It does not allow full economies of scale and thus is
costly
– Firms decentralize their strategy and operations
– Takes steps to isolate the firm from global competitive
forces
• Establish protected market positions
• Compete in industry segments most affected by differences
among local countries
– Deals with uncertainty from differences across markets
– Unilever for long term used multi-domestic strategy but
is seeking better coordination and economies of scale
at regional and global basis
• 3. Global
– Firm offers standardized products across country
markets, with the competitive strategy being dictated
by the home office
– Emphasizes economies of scale
– Facilitated by improved global reporting standards (i.e.,
accounting and financial)
– Strategic & operating decisions centralized at home
office
– Take home innovation and local units to across
countries
– It is a low risk strategy but misses on local
/customized markets
 – Yahoo and eBay experienced these challenges when moved in
Asian countries –eBay failed in China and Japan
– Google is having trouble competing against Baidu with 62%
market share
• This strategy requires sharing of resources and cooperation and
coordination among national units
• It is more successful in regions like EU, NAFTA, ASEAN
• CEMEX is the third largest cement company strong in EU and
Americas, with 50 countries and 50,000 employees
• It follows global strategy. Integrates businesses across the globe,
uses internet to coordinate, logistics and an extensive supply
network
• Because of increasing global competition and need to be cost
efficient while providing high quality products , many firms are
taking on to the transnational strategy
– Involves interdependent SBUs operating in each
country
– Home office attempts to achieve integration across
SBUs, adding management complexity
– Produces lower risk
– Is less responsive to local market opportunities
– Offers less effective learning processes (pressure to
conform and standardize)
• 4. Transnational
– Firm seeks to achieve both global efficiency and local
responsiveness – these are competing goals!
– Requires both global coordination and local flexibility
with this strategy/structure combination
• Flexible Coordination: Building a shared vision and individual
commitment through an integrated network
– Challenging, but becoming increasingly necessary to
compete in international markets
– Growing number of global competitors heightens need
to keep costs down while greater information flow and
desire for specialized products pressures firms to
differentiate and even customize products –
nonetheless,
– Increasingly used as a common strategy
 Strengths and Limitations of Various Strategieshs
and Limitations of Various Strategies
Strategy Strengths Limitations

International Leverage and diffuse Limited ability to adapt to

parent’s knowledge and local markets.
core competencies. Inability to take advantage of
Lower costs because of new ideas and innovations
less need to tailor products occurring in local markets.
International and services.
Greater level of worldwide
coordination
Global
Strong integration across Limited ability to adapt to
various businesses. local markets.
Global Standardization leads to Concentration of activities
higher economies of scale may increase dependence on
which lowers costs. a single facility.
Helps to create uniform Single locations may lead to
standards of quality higher tariffs and
throughout the world. transportation costs.
 Strengths and Limitations of Various
Strengths and Limitations of Various Strategieshs
and Limitations of Various Strategies
Strategy Strengths Limitations
Multidomestic tAbility to adapt products Less ability to realize cost
and services to local market savings through scale
conditions. economies.
Ability to detect potential Greater difficulty in
Multidomestic opportunities for attractive transferring knowledge across
niches in a given market, countries.
enhancing revenue. May lead to “over adaptation”
as conditions change.
Ability to attain economies Unique challenges in
of scale. determining optimal locations
Ability to adapt to local of activities to ensure cost
Transnalonal markets. and quality.
Ability to locate activities in Unique managerial
optimal locations. challenges in fostering
Ability to increase knowledge transfer.
knowledge flows and
learning.
Entry Modes of International Expansion
International Entry Modes (Cont’d)

• 1. Exporting
– Involves low expense to establish operations in host
country
– Often involves contractual agreements
– Involves high transportation costs
– May have some tariffs imposed
– Offers low control over marketing and distribution
– It may be difficult to market competitive product that is
customized
– Cost leadership enhances the performance
– Often export to close markets due to transportation
cost and similarity in markets- NAFTA
– Small businesses use this mode
– Currency exchange affects small firms adversely
International Entry Modes (Cont’d)

• 2. Licensing
– Common form of network, esp for SMEs
– Right to use technology for manufacturing, normally paid royalty
and/or down payment
– Licensee make investments in manufacturing/ marketing or
distribution
– Licensing is a way to expand returns on prior innovation
– Involves low cost to expand internationally
– Allows licensee to absorb risks
– Has low control over manufacturing and marketing
– Offers lower potential returns (shared with licensee)
– Involves risk of licensee imitating technology and product for
own use
– May have inflexible ownership arrangement- brand can slip
– PMI licensed manufacturing of cigarettes in China
International Entry Modes (Cont’d)

• 3. Strategic Alliances
– Involve shared risks and resources
– Knowledge of new markets
– To gain access to technology
– Can avoid Tariffs
– Facilitate development of core competencies-GM &SAIC JV
– Involve fewer resources and costs required for entry
– May involve possible incompatibility, conflict, or lack of trust
with partner
– Trust is the KSF for alliance success
– Equity based alliances are more successful
– Are difficult to manage
– Many alliances fail
– Alliances can lead to acquisitionss
International Entry Modes (Cont’d)

• 4. Acquisitions
– Allow for quick access to market
– Fewer company acquisitions in corrupt countries and pay less
premium
– Involve possible integration difficulties
– Are costly and require debt financing
– Have complex negotiations and transaction requirements
– Post-merger Integration difficulties are many
International Entry Modes (Cont’d)

• 5. New Wholly-Owned Subsidiary/ greenfield

venture
– Is costly- involves lot of resources but offers maximum control
– Protects proprietary technology
– In service industry subsidiaries and expatriates are preferred
– Maintains control on manufacturing, marketing and distribution
– Involves complex processes
– Has the highest potential returns
– Carries high risk esp in emerging markets where JVs preferred
– Greenfield venture: Establish entirely new subsidiary
Choice of Entry

Type of Entry Characteristics

Exporting High cost transaction, low control
Licensing Low cost, low risk, little control, low
returns
Strategic Shared cost, shared resources, shared
Alliance risks, problem of integration (two
corporate cultures)

Acquisition Quick access to new market, high

investment cost, complex negotiations,
problems of merging domestic operations
New wholly Complex, often costly, time consuming,
owned high risk, maximum control, potential
subsidiary above average returns