Internationalization Theories - Essay Example

INTERNATIONALIZATION THEORIES By of School and Introduction The process of firm internationalization in modern business practices is fairly complicated with diverse models and theories that must be effectively inculcated for the success of the firm. The internationalization process dates back to the ancient days when firms adopted administrative heritage together with the strategic planning aspects at large. In this practice, a wide range of decision making draws on such theories in the numerous functions of business. Essentially, the internationalization theories are important in providing conditional statements for the business practice, and they generally deal with the business strategy and development questions. This article provides a critical analysis of the various theories applied in international businesses. There is a comprehensive description of the individual theoretical aspects, and how they compare with other internationalization theories. The eclectic paradigm Dunning’s eclectic paradigm (OLI) is one of the most influential empirical investigation frameworks towards the determination of foreign investment, although it has been identified to have numerous demerits, some that have been acknowledged by Dunning. Regardless of this, the electric paradigm has been instrumental in offering a holistic framework for the purpose of investigating the importance of factors that affect both the initial multinational enterprise (MNEs) expansion through foreign expansion, and the eventual growth of the business activities (Stoian and Filippaios, 2005). This framework enables comparison between various theories through the establishment of the common ground between a number of approaches, as well as clarification of the particular questions posed by the theorists, and also provides different analytic levels. Due to the generality of the OLI, the theory has been limited to the task of explaining particular types of foreign behaviors or production of specific enterprises, unless there is an application of the framework to a specific predefined context. As opposed to other theories, OLI is specific to particular contexts of application, especially in its configuration that is likely to differ in different regions, firms, countries, industries, or in the value-added practices. On the other hand, the OLI application is most likely to rely on Foreign Direct Investment (FDI) motivators (Demos, Fragkiskos and Marina, 2004). The primary assumption of the OLI is that the FDI returns, and thus the entirety of FDI, may be explained using three factors. They include: the firm’s ownership advantage ‘O’, which indicates who produces abroad, as well as other types of international activities; internationalization advantage ‘I’; and the location advantage (L), which gives reasons for firms to take part in FDI as opposed to licensing the foreign companies to make use of their proprietary assets (Adner and Kapoor, 2010). For the firm to effectively compete within a foreign location, it must have particular ownership advantages, which are also referred to as monopolistic or competitive advantages, which compensate for the extra costs incurred during the setting up of its operations in the foreign country, which are not faced by the producers from within the country (Desbordes, 2007). Toyota Company is among the foreign companies that have been able to effectively apply this advantage over its competitors in its push for internationalization, despite the high competition faced in the automobile industry. Toyota’s competitive advantage lies in its low cost and differentiation strategies, which have been instrumental in maintaining the company’s competitiveness in the automotive industry. The company uses a broad market scope, which includes virtually all types of customers willing to purchase their automobile. Such strategy makes Toyota a popular brand in the market since they have something for all (Inkpen and Ramaswamy, 2007). For instance, the company produces SUVs and four-wheel drive trucks meant for people living in areas with severe weather conditions, as well as the hybrid models such as the Prius, which are meant for the customers that are economically friendly. The wide range of products from which the customers can choose, together with the relatively low prices means the company is capable of selling more of its vehicles than the competitors. Another important condition for international production is the ability of the company to transfer the ownership advantages it enjoys in the original firm across the international borders, as opposed to selling to the third party through franchising or licensing (Trevino and Mixon, 2004). According to Dunning, this internationalization factor is seen as a choice to be made between licensing another firm for the exploitation of the O advantage, and investing abroad to exploit it. The advantage of internationalization of ownership takes place when international markets fail to function as the ideal modality for the transaction of intermediate services and goods, which is a reflection of a potential market failure. An increase in the perceived market failure cost results in a better appeal for the MNEs to foster ownership-advantage internalization. A lack of external market for the ownership advantage of the firm makes the distinction between ‘O’ and ‘I’ irrelevant. It is also right to make a distinction between the capability of MNEs in market internalization together with their willingness to accomplish it (Demos, Fragkiskos and Marina, 2004). Another important condition, according to the electric paradigm, is in regard to the ‘where’ of the production. The MNEs may choose to engage in international production any time it serves their best interests for the purpose of combining intermediate products from their home countries, which can be spatially transferred with some immobile factors, or the intermediate products that are specific to the country abroad (Adner and Kapoor, 2010). Among the location advantages are: factors availability and endowment; public interventions or geographical factors in the resource allocation, according to the legislations of production and technological licensing; the policies related to exchange rates and taxation that should be exploited or avoided by the multinational firm; and the patent systems (Javalgi and Martin, 2007). Even though the location advantages are handled independently from the ownership advantages in the electric paradigm, the decisions regarding where the expansions should be done, on the international level, does not rely on the ownership advantages, or the method through which such advantages will be applied. This means that there is consistency in the interplay among ‘O’, ‘L’ and ‘I’. It is anticipated that the MNES transfer their respective improved advantages of ownership as well as their ability to handle various institutional challenges within the particular host nations for the purpose of making their operations in such host economies efficient (Buckley and Ghauri, 2004). Therefore, the differentiation is done between the ownership advantage types, which include the firm-specific advantages that can be used in various locations, and those built by the firm gradually during the interaction with their institutional environment at home or the institutions within other countries in which subsidiaries are established. The Electric paradigm has faced a significant level of criticism, particularly in regard to its loose and broad structure. For instance, among the arising issues has been whether or not a move that slumps the O, L, and I advantage evidence could be operational. In this argument, the O, I, and L are seen as representing necessity, but insufficient FDI conditions (Oliver and Hayward, 2007). It is also not clear on the number of competencies that a firm has to posses in order to make O a necessity, the same way as it was hard to establish the required significance for the I advantage to deserve an FDI. Additional criticism has been directed to the three forms of advantages, including whether or not they are independent and necessary. According to Desbordes (2007), an observation from the epistemological viewpoint reveals that the distinction borders between I and O advantages is significantly blurred. On the other hand, Bevan, Saul and Klaus (2004) observe that the intermediate product market failure is a necessity, and presents sufficient conditions for MNEs existence. These claims have been difficult to refute, and this is seen when Buckley and Ghauri, (2004) acknowledge partly that the paradigm brings in generality in situations where other modes of entry are considered. Essentially, the OLI is thought to provide explanations of anything by mere addition of extended sets of variables. First Mover Advantage The first mover advantage is the benefit a firm enjoys due to its ability to enter into the new market prior to other players. Such benefits are inclusive of the economic profits, although most of the studies have put much emphasis on the organizational survival and acquisition of market share, which are easily measured. Although the first mover advantage term implies that there is desirability in the early market entry, the pioneering practice into a market is highly risky. According to Vachani (2005), the advantages enjoyed in the new market pioneering are mostly offset by the disadvantages involved. The determination of whether or not a first mover advantage is available in a particular context is influenced by the nature of the emerging market together with the firm entering the market. Different observers believe that the first movers are often less successful compared to the other entrants that come afterwards, and the established firms are often encouraged to track the early development of the market in order to pursue the strategy of fast follower (Cantwell, 2009). The emerging markets present different forms of challenges for the firms venturing into international production, particularly due to the unstable demands of products, the resource scarcity, the deficiencies related to infrastructure and institutions, as well as the inadequate training among the workers. Additionally, based on the limited success that the multinational enterprises have previously encountered in the emerging markets, there is a need for more research in order to have a better understanding of how the international investors can establish and maintain their competitiveness within the emerging world markets. The choice of when and where to make an entry into the foreign market, for the purpose of achieving market success, involves asking important questions about the timing of the market entry (Bevan, Saul and Klaus, 2004). Studies into the market entry timing have highlighted on the important dimensions of the entry into the market through separate streams of research: the location and the entry timing. The entry timing research has particularly led to suggestions that entry into the foreign market by a firm, as a pioneer, gives the firm the chance to acquire the first mover advantages (Cantwell, 2009). However, there have equally been suggestions that a late entry into the market helps the firm acquire the benefits related to the agglomeration economies. The discussions related to decision making on the internationalization strategy involve identification of the major aspects of the competition, amongst which are the temporal dimensions. Based on the enterprise internationalization process studies, together with the analysis of the global markets within which they compete, it is important to analyze the moments during which every the particular firm can enter the market (Stoian and Filippaios, 2005). According to the first mover advantage theory, the first entrant, who is often from the developed countries, is referred to as the first mover, whereas the other competitors, most of whom are from the developing or emerging countries, make their entry into the market at a later stage when the market has already been consolidated and are thus referred to as the late movers. This theory demonstrates the advantage that the first move into the business is bound to enjoy. For instance, the first mover enjoys the competitive advantages, which can be categorized into three, namely; the technological leadership in the processes and products, the basic acquisition of limited goods, as well as the cost development of buyers through changing of the suppliers (Nachum and Wymbs, 2005). The acquisition of technological leadership occurs through advancing according to the learning curve that represents the producing capacity of more goods by use of fewer resources. In this case, therefore, the first movers would enjoy the initial business monopoly in which they dictate the price of resources and that of goods produced due to the lack competition. On the other hand, the technological leadership could be obtained from the developed patents on research and development (R&D). It is also observed that the first movers can acquire competitive advantages through the acquisition of scarce resources, amongst which are the production factors, before other players in the field can compete for them (Brada, Kutan and Yigit, 2006). The first mover enjoys the natural resources, employees, distributors and suppliers, the product characteristics in production equipments and plants. The advantages are particularly visible when other competitors who delay face increased costs in order to obtain similar resources, hence resulting in decisions that entry is not feasible (Nachum and Wymbs, 2005). Another advantage associated with first movers could result from the level of dependence of the buyers on suppliers. The first movers could benefit in a number of ways including; when the buyers incur high initial investments in order to adapt to products that are about to be supplied; during the presence of agreements, which should not be discontinued; when there is a proper understanding of the buyer’s needs by the supplier, and learns how well to add value to such needs; or during the informational asymmetries where the buyers show loyalty to the initial supplier with the intention of avoiding the risk of buying worse products from unknown suppliers (Tihanyi and Roath, 2002). Product Life-Cycle Theory The international product life cycle (IPLC) theory was meant for the advancement of the trade theory beyond the statistic framework used for comparative advantages. Ricardo’s approach involved a simple experiment that provided explanations on the benefits enjoyed by a country that took part in international trade, despite producing all of its products at the least cost possible, hence finding no desire to transact with other partners in foreign countries (Trevino and Mixon, 2004). In his evaluation, it was of greater advantage for the country that enjoys absolute product category advantage to trade and allow specializations for its workforce to the categories that have highest added value. In his analysis, Vernom concentrates on the comparative advantage dynamics and draws inspiration from the life-cycle of the products in explaining the changing trade patterns over time. The internationalization process described in the IPLC demonstrates how the manufacturer within the advanced country, amongst which is the US, starts the sale of new and technologically advanced products to consumers with high income within the home market. In this case, the locally-built capabilities stay within closer vicinity with the clientele as well as minimization of the uncertainities and risks (Vachani, 2005). When the consumer demands within other markets goes high, the production shifts into the foreign country and this enables the firm to capitalize on the economies of scale as well as bypassing trade barriers. When the product becomes mature and grows into more of a commodity, there is bound to be an increase in competitors. At the end of the process, the innovators coming from the advanced country grow more challenged within the home market; this makes the advanced country a net product importer (Oliver and Hayward, 2007). The eventual product is thus produced by either the competitors within the countries that are less developed, or the production facilities based in the foreign countries by the innovator, in case of any multinational business involved. The IPLC trade cycle stages: i. New Product The IPLC starts with the desire of the company in the developed company to exploit the technological breakthrough through the launch of innovative new products within its own home market. The likelihood of the market starting in the developed nation is higher due to the presence of high-income consumers within the country, who have the ability of buying or show the willingness to experiment the expensive products produced (Brada, Kutan and Yigit, 2006). An example of these is the Jaguar car manufacturers based within the UK, who enjoyed the low price elasticity of the local market. At the new product stage, the company was also able to obtain a capital market for the funding of the new products within the country; the local production of the new product served in minimizing the uncertainties and risks. ii. Maturing Product This stage is characterized by the export of the products to other advanced countries, and this makes it politically necessary and economically possible to start local production. There is a notable stability and increase in the production process and design. The FDI within the production plants brings the unit costs down due to the decreased costs of labor and transportation (Li and Scullion, 2010). The offshore facilities of production are often used for serving the local market, which substitutes exports from the home market of the organizations. iii. Standardized products This product stage is characterized by a saturated principal market. The original comparative advantage of the innovator that is based on the functional benefits fades out, and the firm turns its focus on reducing the process costs as opposed to adding new features to the products (Tihanyi and Roath, 2002). Therefore, the products together with their process of production are increasingly standardized, hence enabling increased economies of scale as well as the mobility of operations in production. Conclusion The three theories discussed provide the important factors for internationalization of production firms, through highlighting on the related benefits and cautions to consider prior to the decision to start up firms abroad. All the theories, namely; the Dunnings Eclectic Paradigm, Krugers First Move Advantage Theory, and Vernons Product Life-cycle Theory promote the common goal of promoting business success and profitability through investment in the untapped markets abroad. However, the Vernons Product Life-cycle theory differs from the rest due to its critical approach to investing abroad as opposed to production within the country of origin. This theory approves internationalization of production at the least risk for the firm, and would rather promote production from within the original country unless the foreign market proves worthwhile investing into. On the other hand, the First Mover advantage theory looks the most risky of the three due to the overwhelming assumptions that the investor is bound to benefit massively from pioneering, while overlooking the risks and uncertainties involved in the practices. The Dunnings Eclectic Paradigm, however, has numerous limitations of its application, with its relevance limited to particular business practices, the nature of business, and the production location, hence making it less universal for the general internalization practice. Bibliography Adner, R., and Kapoor, R., 2010. Value creation in innovation ecosystems: how the structure of technological interdependence affects firm performance in new technology generations. Strategic Management Journal, 31(3), pp. 306-333. 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