Different Modes of Internationalization - Essay Example

? Different modes of Internationalization Contents Contents 2 Internationalisation 4 Trade 4 Advantages of Trade 4 Disadvantages of Trade 5 FDI 5 Advantages of FDI 6 Disadvantages of FDI 6 ‘Home’ and ‘Host’ countries 7 Different Types of FDI 7 Different Types of Trade 8 Value chain 9 Greenfield 9 Brownfield 10 FDI alone or with partners? 10 Disadvantages of Strategic Alliances 11 Post Merger Restructuring 11 Push vs. pull paradigms 12 Traditional ‘transformation’ model 12 Netting 13 Hymer’s M-Form and U-Form 13 Vernon’s product life cycle (PLC) theories 14 Uppsala ‘stages of internationalization’ 14 Conclusion 16 Internationalisation Internationalisation is the process by which any company that is operating in its home country or a particular nation aims at expanding to the foreign soils through various techniques in order to tap the international markets and to move out of any stagnation in the growth of the company. There are various methods or strategies in which the corporations enter into the foreign markets. This essay provides a detailed analysis of the options that are available for a company for its overseas expansion. Trade Countries of the world get involved into trading relations with one another in order to get some advantage of the resources in which each of the countries specialises in. The absolute advantage theory of Adam Smith states that the countries that specialises in one particular resource would exchange the resource for something that the other country specialises in. For example one country may have enough amount of wine and a second country may have abundance in cheese. Then these two countries would exchange their resources of wine and cheese with the resource that they have in abundance. David Ricardo on the other hand had put forward his comparative advantage theory in the context of international trade. According to him the countries that have comparative advantage in the production of one good would export that good to another country which has comparative disadvantage in the production of that particular good. Advantages of Trade Creation of jobs and attraction of investments from various sectors which otherwise would not have operated to the maximum capacity. Introduction and exchange of technology and knowhow of production which adds to the total income of the countries that are involved in trade. Access to the international markets and thereby the customers can buy the various types of products and services Increases the competition among the domestic and the foreign players. Disadvantages of Trade Various issue related to the cultural identities of the nations crop up like most of the companies like Coca cola or Microsoft are built upon the cultures of the US and the other nations are forced to embrace it. The emerging nations are forced to meet the demands of the developing nations and thus they do not often meet the needs of the domestic markets. The safety standards and the compensation of the workers are often not up to international standards. Political constraints make the trade relations between countries complicated which may lead to imbalances in the BOP position of the countries. FDI Foreign Direct Investment is a form of investment that a company or an individual which is based in a particular country would make in a foreign country in form of investments in new projects or existing projects of local undertaking. The company or the project in the foreign country in which the company invests would prefer to maintain control over it. The economies in which there are prospects for growth and has sufficient resources, there would be considerable amount of foreign investments. There are several ways in which the FDI can be made. Setting up subsidiaries Getting equity control over an existing company in the overseas country Strategic alliances For example a company based in Germany may be interested in any company producing electronic products based in China. The company can get into strategic alliance with the Chinese company or may become of minority stakeholder in the process. Again the prospects of opening up a subsidiary by the German company in China may be huge because of the availability of the human as well as the technological resources. Advantages of FDI Competitive advantage for the companies Investors are able to make major benefits out of such investments There in improvement in the employment and the standard living for the host nations Advantage of technology transfer to the host nations Disadvantages of FDI Problem of existence and cost for the domestic companies Introduction of automation may lead to reduction in employment of the unskilled labour force ‘Home’ and ‘Host’ countries In the context of FDI the popular terms are the home country and the host country. The nation in which the company is based and its operations are originated is known as the home country. The country where the business intends to expand or have its operations or make investments is known as the host country. Foreign investments take place in the countries that generally have better growth prospects compared to the home country. Most of the developed nations prefer to make their investments in the emerging nations like China, India. South Korea, Brazil, Mexico. The reason behind this is that most of these countries act as favourable host countries because of their high potential for growth and much flexible policy for the foreign investors. Different Types of FDI The foreign direct investment that takes place in a country may take various forms. The horizontal FDI takes place in case a company that has a certain operation in one country would replicate the same activity in the host country which should be at the same stage of the value chain as the home country. Vertical FDI on the other hand is the type of investment in which the company would manoeuvre through different value chains both upstream as well as downstream. This means that the business would conduct value addition for different stages in the vertical manner in the host country where the company is investing. A third form of FDI is the Platform FDI where the company in the home country uses the host country as a platform for the production purposes but the final products would be exported to a third nation which is neither the home country nor the host country. Out of these three types of FDI, Horizontal FDI discourages the prospects of international trade because the final produce of the host country would be manufactured for the market of the host country. Both Vertical and Platform FDI are somewhat opposite to this and acts as a catalyst of foreign trade. Different Types of Trade Trade may be categorised as free trade and protected trade. In case of free trade there is a lot of liberty among the nations that are involved into the trade relations. The foreign firms and players can charge a price and sell the quantities at their discretion. There is a more competitive environment in the international platform. On the other hand due to the availability if the foreign products in the domestic market the domestic players have to compete with the foreign players. Thus there is apparently no barrier to entry or exist by the foreign players in the domestic economy of a particular nation and thus there is lack of government intervention in the activities of trade (Appleyard, Field and Cobb, 2006, pp. 178-196). On the other hand in case of protectionism in a particular economy, the government intervene into the various processes of trade and thus limits the amount of export of domestic goods and the import of the foreign goods. This is done mainly through the imposition of the policies of protection like the tariffs, quotas and other trade barriers (Krugman, 2009, pp. 36-59). These controls may be quantitative like the imposition of quota would restrict the amount of gold that would be imported in the country. On the other hand the price controls would be the implementation of the tariffs whereby the government would impose a tax on the prices of the imported goods or provide a subsidy. Apart from this the government also engage in the import substitution and the export promotion policies as a part of protective trade measures. Value chain Michael Porter was the first proponent of the concept of value chain who considered it to be a series of activities by a firm from the acquisition of the raw materials till the delivery of the final product to the customer. At each step of the process the value of the product gets on increasing. Thus all the activities are smaller subsystems that make up the larger activity. Vertical integration of a company is the control of these activities of the value chain. Each of the processes is either under the ownership of one or multiple companies or individuals (Porter, 1985, pp. 59-65). Thus it is the extent to which a company would own the upstream of the activities of the suppliers as well as the downstream till the final product reaches the customer. Upstream (backwards integration): This would take place in course of the process of the conversion of the raw materials into the intermediate or the final products. The control of the suppliers of the raw materials and the intermediate products would be the upstream in the value chain. Downstream (forward integration): This would be the control of the final products from the factory to the wholesalers and to the retailers till the product would reach the customer. Greenfield Another popular form of internationalisation strategy by the corporations is the Green field projects. These are such projects that do not have any previously imposed restrictions by the various networks of operations. Most of the Greenfield investments are those which a company does by funding the manufacturing set up, the offices as well as the physical parts of the infrastructure of the projects. These are popular in case of Foreign Direct investment in which the company located at a particular country would invest on the foreign country with the establishment of the new production and manufacturing infrastructures. These are mainly related to those kinds of investments that are new in the host country. Advantage of Greenfield investment is that the foreign company can tap into a new market and at a much lower costs. For example a company in the US may be interested in the Greenfield investment into clothing industry. The availability of raw materials and labour would be at a cheap rate. This would help the company to make larger profits out of the operations in the developing countries. Brownfield A Brownfield investment takes place for any existing company which is in a sick condition and needs funding for any kind of expansion or to improve the scale of production. For example a steel mill may get the support of the Brownfield investments that would help the company in the moving to a better financial position by implementation of the modern technology of production or reengineering of the management. Thus the parent company in one nation would have some equity control over the company in which the funding is provided (Sullivan and Sheffrin, 2003, pp. 551-563). FDI alone or with partners? A foreign company may enter into the host country through various forms of strategic alliances as follows The company can acquire equity of a local company and get the voting rights Setting up subsidiaries which are wholly owned by the foreign company Joint Ventures of the foreign companies with the local companies where there would be equal rights of the domestic and the foreign companies (Pearce and Robinson, 2007, pp. 121-149). The foreign company can set up franchise in the host country where the local company would be incorporating the business model of the foreign company but the majority stake would be of the local company. This form is known as Franchising. Through Licensing in which intellectual property rights or the patents of the foreign company would be used by the domestic company. Disadvantages of Strategic Alliances In most cases of these strategic alliances there is a problem of cultural exchange. This is because the foreign company having more stakes in the business in the host country would want to incorporate the foreign culture in the local nation which the employees of the local nations might detest. Post Merger Restructuring In case of a company coming into a foreign country with a new technology and the knowhow, the entire business would require restructuring. The employees require the up gradation of their skills Need for change in the product designing as well as marketing strategies Several companies have experiences in making FDI in foreign nations. They get accustomed to the various nuances of expanding overseas to a new market. In the process several loopholes are found to exist. The companies learn from the mistakes made in one country before moving to another country. Push vs. pull paradigms Multinational corporations offering a product may adopt the push or the Pull strategy in order to increase the revenue in the host country. Push Strategy would incorporate the promotion of the product in the host country with a new product design and technology so that the consumers would become interested in the product. This is implemented where the company does not have any uncertainty regarding the demand from the customers. This might lead to huge amount of inventory if the stocks are not sold as expected. Pull Strategy on the other hand would incorporate the aspect that the consumers would be demanding the products The production would take place as per the consumer demands in the market The entire process would be driven by the market demand Traditional ‘transformation’ model This model focuses more on the export of the goods or services to the foreign country Less stress on the FDI from the point of view of manufacturing or distribution in the foreign subsidiary. Mainly of two types- based on natural resources and based on export of products. Netting Organisation may implement netting techniques to deal with the mutual obligations between the headquarters and the subsidiaries. This would be done by reducing the net value of the transfers. Most of these transactions are undertaken using the international rates for settlement across the nations like the London Interbank Offered Rates (LIBOR). The companies hedge their risks like the country risk or the currency risks by investing in the foreign countries through diversification. They may also conduct this in order to get the benefits of taxation in the host countries and may profit out of it. Hymer’s M-Form and U-Form Stephen Hymer has devised several business models in which the multinational companies can operate. M-form is the multidimensional form in which there would be a parent as well as the subsidiary firm. The smaller firm would be making use of the brand identity for accessing the markets in the host country. Benefits from economies of scale of operation Centralisation of the decision making in the headquarter may hamper the liberty of the local managers U-form is the unitary form of the business model where there is specialisation of the particular functional areas of the business. None of the parts in case of the U-form would be able to stand by itself Vernon’s product life cycle (PLC) theories Raymond Vernon had put forward the theory of Product Life Cycle Management in 1966. The theory states that a business adopts several strategies from time to time in a series along with the changes in the various stages of the life cycle of the products. According to this theory there are five main stages of Product Life cycles (Vernon, 1966, pp. 190-207). Introduction when the products are exported to the foreign markets Growth where the product is produced in the local market Maturity when the product is produced by lowering the costs Saturation includes the stage where sales reaches a plateau Decline where the product has to look for the other markets in the poor countries Uppsala ‘stages of internationalization’ The Uppsala Model is one of the popular theories about the process of Internationalisation posited by Johanson and Vahlne. A particular firm may not have any presence in the foreign markets. However, the company may take strategies to make a considerable presence in the foreign markets. The Uppsala Model states that the companies go through various stages in its attempt to make a position in the foreign markets. This means that the company would first start gaining experience in the domestic markets about the various features of the products and understand the demands and needs of the customers. The company would make use of the experiences in the domestic markets to explore the markets in the foreign countries. The firms generally have a tendency of going into the countries that are close geographically in the first place. The countries would also have cultural similarities with the countries where it would make the first move of the foreign operations. The business would then gradually explore the culturally distant or the geographically distant countries for the marketing opportunities. Figure 1: Uppsala Model Source: Johanson and Vahlne, 1977, pp. 23-32 The companies make their products familiar in the foreign markets by exporting their products in those markets. In the second stage the companies would open their subsidiaries in those foreign markets which may either be production units or the units for the distribution of the products. This takes place both at the company level as well as the country at which it is targeted (Forsgren, 2002, pp. 257-277). The model suggested that initially there would be occasional orders for exports to the foreign country. As the demand in the foreign country increases with familiarity of the products there would be regular orders from the nations. However, the model is aimed mainly at increasing the sales and to cater to a wider market. Along with that the dedication of the company towards the foreign market would vary with the demand and sales in those countries. Conclusion From the above analysis it is clear that there are several alternatives that lie with the foreign companies to invest in the overseas nations. However the path that a company would take depends on the industry in which the company operates the strategic position of the company in the market, the intensity of the competition, the prospects and the availability of resources in the foreign nations as well as the stage of the company in the product life cycle. However in today’s age of globalisation internationalisation is becoming a very popular strategy for most of the corporations for surviving in the market in the long run. References Forsgren, M., 2002. The concept of learning in the Uppsala internationalization process model: a critical review. International Business Review, Vol. 11(3), pp. 257-277. Johanson, J. and Vahlne, J. E., 1977. The Internationalization Process of the Firm-A Model of Knowledge Development and Increasing Foreign Market Commitments. Journal of International Business Studies, Vol. 8(1), pp. 23-32. Vernon, R., 1966. International Investment and International Trade in the Product Cycle. The Quarterly Journal of Economics, Vol. 80(2), pp. 190-207. Porter, M. E., 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: Simon and Schuster. Appleyard, D.R., Field, A.J. and Cobb, S.L., 2006. International Economics. Boston: McGraw-Hill Publishing. Sullivan, A. and Sheffrin, S.M., 2003. Economics: Principles in action. New Jersey: Pearson Prentice Hall. Krugman, P.R., 2009. International Economics: Theory and Policy. New Delhi: Pearson Education India. Pearce, J. A. and Robinson, R. B., 2007. Strategic Management. New York: McGraw Hill Publishing. Read More