Internationalization Process, Multinationality and Value Creation - Essay Example

Running head: the internationalization process, multinationality and value creation 12th March Introduction As the competition in the local market becomes stiff, firms have opted to go global as a way of expanding their market as well as capturing the unexploited resources. Internationalization is the process of expanding involvement of organizations in the global market. Due to the need to improve their sales, the number of companies that target the international market has grown resulting to extensive competition in the market just like in the local market. Internationalization process has not only benefited the firms but also it has positive implications for the shareholders and other stakeholders. This paper aims at discussing the way shareholders value is created by becoming international as well as the extent to which different internationalization strategies create different values. As part of the stakeholders in a company, shareholders are important parties that cannot be overlooked in the firm’s activities. Apart from providing capital for the company, the shareholders are involved in hiring of auditors and making decisions that the management should follow. In this regard, any company that aims at operating at the international market should put the interest of the shareholders at heart. On their part, entrepreneurs who are focused in the process of internationalization their business should think globally and have the ability to understand the cultural diversity that exist in the international market (Krugman and Wells, 2006). Through appreciating and understanding the values, beliefs and operations of the global companies, business owners will adopt effective strategies to ensure they become successful. The section below discusses some of the benefits that shareholders attain out of the internationalization process. Diversification of revenue As the major contributor of the firm’s capital, shareholders aim at getting high returns for their investments. On their part, companies are under obligation of ensuring security of the shareholders investments including assets. Once a firm enters the global market through internationalization, it is able to increase its customers thus increasing its revenue. As the result the shareholders returns on investment is increased leading to improved confidence on the companies’ performance. Faster growth Shareholders and investors confidence is achieved when a company indicates gradual growth. During the internationalization process, shareholders benefits from the growth that they associate with increased investments and returns. Similarly, through the growth, the company is able to effectively face off the local competitors as well as some global firms. As companies grow and participate in the international market, they are able to venture into other countries with unexploited resources. For example, if a company like U.S. Precious Metals, Inc enters the emerging markets for example South Africa, it will have an opportunity to exploit the gold resources that may exist in the foreign market. As a result, the company’s shareholders will have higher confidence for the company making them to increase their investments. Improved return on capital With the sluggish growth in some of the developed countries as well as emerging economies, international business expansion has become an important strategy for most organizations. According to the Chief Executive magazine, shareholders remand companies who grow faster outside their countries. In this way, the business managers are able to make viable investment decision that in turn make global companies to generate high return on capital. High rate of reinvestment As companies enter the international market, they are able to get opportunities where they can reinvest their capital. For example a beverage company that enters a foreign market where agriculture is the major source of foreign exchange may opt to invest some of its funds in agricultural activities for instance in growing fruits. In this way, such a company will lower the costs of importing the fruits thus resulting to reduced cost of operations and increased profits. Global networking One of the major aspects that make an organization to develop and become competitive is strong positive relationship between the shareholders and the managers. Expanding into international market gives a firm the distinct advantage of connecting with new suppliers, customers and investors. For instance, a company operating in US may find a cheaper workforce and less expensive modes of advertising in the emerging economies. Basically, the opportunities for networking in the international market are limitless. This is based on the fact that the more the places a firm establishes its operations, the more connections it makes with the foreign investors. As a result, the shareholders are able to enjoy the contributions made by foreign investors who are become interested in becoming part and parcel of the company. Opening the door for future opportunities The internationalization process can also open the door to future expansions. It is worth to note that one of the fears that shareholders have is loss of their investments and bankruptcy of their companies. In addition to helping the organizations to connect to new shareholders and investors, global expansion expands the sales base. Similarly, such companies adopt new technologies and ways of undertaking their activities as well as expansive workforce. For example, US companies entering Japan have noted that programs like Theory Z and Six Stigma are highly effective in shaping the strategies they adopt. Performing in a new market makes organizations to improve their efficiency in addition to helping the management discover opportunities for growth. Larger market Apart from effective management, shareholders are concerned about the market for their products. For instance, agricultural based firms in the developing countries are faced with lack of markets for their produce due to the stiff competition from other Asian and South American based companies. Through internationalization, companies can help open up bigger market that local companies are not able to reach. The larger market comes with the benefit of exposing the excess products, potential for higher profits, and expansive customer base. In addition, international marketing introduces the company products to totally new population an aspect that positively impact on the company sales and market share. Even though the expense to be incurred during the internationalization process may act as an obstacle for smaller companies, the potential reward that emerges afterwards offsets the initial costs. Not-well established organizations can sometimes merge together or partner with established companies in order to reduce the costs as well as to have an improved logistics. Brand reputation Shareholders like their products to enjoy strong awareness. While most of the locally made products are known by the local consumers, foreign customer may not be having any knowledge of such products regardless of their value. Thus, internationalization comes hand in hand with international marketing that has unique advantage of helping to improve brand reputation. As the result, the company sales and profits increase resulting to higher returns for the shareholders. Extent to which different internationalization strategies create different values The Uppsala Internationalization Model Having being established by the Swedish researchers, Uppsala model distinguishes for steps that firms follow during the internationalization process. The steps cannot be viewed independently. The key steps are Step 1 No regular export activities Step 2 export mode Step 3 Establishment of foreign sales outlets Step 4 foreign manufacturing or production The model indicates that companies in normal circumstance start their activities in a psychi nearby market. Within that market, companies have extensive knowledge and have significant control of the resources. After the company become more experienced and acquire better resources they expand to external markets. This model also indicates that most of the companies enter the global market through export before establishing a subsidiary (Jan and Jan, 2009). The major issue of the Uppsala Internationalization Model is that increased market knowledge leads to increased market commitment and vice versa. Another notable aspect that model covers is the difference between specific knowledge and general knowledge. General knowledge covers the operations in the foreign market and it indicates that knowledge can be transferred from one market to another. Specific knowledge on the other hand is specific to a particular market and it requires a specific activity for it to be done. This implies that it is difficult to use that knowledge in other markets. Despite being applied in the internationalization process, Uppsala Internationalization Model has some limitation. For example, it fails to describe total internationalization process. For instance, the model does not indicate much consideration as far as management incentives are concerned. Additionally, the model ignored other steps that companies can use during the internationalization process for example franchising. Franchising is considered to be more effective and less risky strategy to enter the new markets. Another demerit of the model is that it does not indicate the reason for foreign direct investment or why companies should follow the steps. Network model of internationalization Network model of internationalization is another form of strategy that companies use to enter new markets. According to this approach, there is a continuous development of relationships that aims at attaining the objectives of companies. The relationships, that emerges after parties build mutual trust and knowledge, are connected by networks that is made up of various parties including customers, suppliers, agents, consultants, distributors and public agencies. Notably, the networks are maintained in order to reduce uncertainty during the initial stages of forming new partnerships. According to Chella (2008), network approach takes into account aspects like knowledge, commitment, commitment decisions and current activities. One of the notable issues that network approach adopts is that for a company growth and development, cooperation is more considered than competition. Additionally, it indicates that once the companies come together, they can come together and organize their resources and capabilities. This implies that a company can have most of its assets located in its parent country but also play a significant role in the international market. Network approach also indicates that firms should first learn about the capabilities, strategies and needs of their partners in addition to getting adequate information on the market networks and business conditions. Network approach indicates that firms can be divided into four groups depending on the environment internationalization. These include early starter, the late starters, the lonely international, and international among others. One of the major values of the network model is that its ideas, concepts and its models have inspired recent work on companies’ internationalization. For instance, it has been noted by some policy makers that it is important in studying of foreign domestic investment. However, the network approach is criticized for its limitation in understanding the pattern of internationalization, making imprecise conclusions, including complex variables, and use of indistinctive methods of differentiating between early and late starters. The innovation related internationalization model According to this model, internalization process is viewed as an innovation of the company. The major reason as to why this view is adopted is due to the fact that changing a well established local company into an international firm is a challenging issue. Companies adopting this model are supposed to change aspects like capabilities, skills, organizational routines, and network ties. This result into slowing down the internationalization process and inability of companies to create new capabilities (Johanson, 2002). Some of the major weaknesses of the innovation related internationalization model is that it assumes domestic maturation, internalization as a strategic option and being tautological. Conclusion For companies to retain their competitive advantage locally and in the foreign market they should evaluate the policies they adopt. Locally, a company can be well established but in the international market, such company may face stiff competition that may even make the companies to be declared bankrupt and closed thus losing shareholders funds. As noted in the paper, shareholders are important part of any company. In this regard, they should be involved in making decision that touches on internalization process. Some of the benefits that shareholders are exposed to include market expansion, increased return on investment, high sales, brand reputation and strong positive relationships with other foreign investors among others. While companies can use different internationalization strategies that include innovation related internationalization, network approach and the Uppsala Internationalization Model, there is need to first make an analysis of the benefits and limitation of each approach. As discussed in the paper, the Uppsala Internationalization Model seems to generate more advantages as compared to the other two approaches. References Chella D. (2008). Analysis of Network Approach in International Business. Available from http://ezinearticles.com/?Analysis-of-Network-Approach-in-International-Business&id=1243253 Jan J and Jan-E. The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies (2009) 40, 1411–1431. Johanson, J. 2002. New technology, new business environments and new internationalization processes? New York: Macmillan Publishers. Krugman, P and Wells, R. (2006). Economics. New York: Worth Publishers. Read More