Internationalisation from the view of a company can be described as the process of becoming multinational. In the first phase of this process a company sells its
products in the domestic market. In a second phase, the company begins selling its products abroad. The next step in the internationalisation process may be the establishment of an international sales network. Then the process of
internationalisation has advanced so far that the individual company has
manufacturing, sales, research and development in a number of countries and it becomes multinational (Levitt, 1986).
Recent literature describes this process often as globalization, due to the upcoming interconnectedness, which has been enabled by international trade agreements such as GATT. In the 1990s under the direction of the WTO, a multilateral trade system has been established, which was an important prerequisite to many former still encapsulated national markets.
The term globalization is frequently used in socio-economical discussions; however, the meaning is somehow blurred and often used as a synonym for the term
internationalisation. From an academic point of view, it seems advisable to define the intended meaning of internationalisation according to the scope of this research. According to Petralla (1996), the concept of internationalisation begins with the expansion of national entrepreneurial activities. This comprises all functions of a firm and ranges from raw material over products and services to financial capital. In contrast, globalization is according to Dicken (1992) more than export or foreign investments and can be distinguished by its additional qualitative aspects. These can be characterized as a higher degree of functional integration with respect to the economic value chain, which goes along with specialisation as well as with social relations across national boundaries.
Some scholars argue that globalization can be seen as an intensified next step of internationalisation and that the globalization process covers the activities of internationalisation as well. However, the analysis of the existing literature is often attributed to internalization theories that are embedded in international business behaviour research. In order to keep the wording consistent and to avoid semantic confusion in this research the term internationalisation is used as a broader
approach under which also characteristics that some researchers group under globalization are reflected, too.
Theories in this academic field of interest have developed over the time. Some of them have been revisited and expanded over the time, other are criticised since they do not fit anymore to the observations obtained in a rapidly changing world. It is the intention of this research to give a comprehensive overview also from the
perspective of the development of the theories over the time. Hence, theoretical reasoning often starts with elder references and ends up with recent research.
Theoretical frameworks regard internationalisation often draws to one of the three main strands of the literature, namely the stage theory, contingency theory(ies) and the resource-based theory. Different internationalisation approaches, which are discussed in detail later, recognize the multiple influences on the internationalisation process and are linked to different fields of research such as export behaviour, international marketing, resource-based literature and international
entrepreneurship. They reflect different basic academic views, such as the economics based view, the behavioural view or the knowledge-based view.
Some explanatory models in the reviewed literature draw on generic economic theories, which they use to interpret particular phenomena with the help of a general mechanism. Certain aspects of internationalisation can be explained by following the transaction cost theory. It states, that firms exist to minimize the cost of making transactions through either hierarchy governance structures, i.e. within the boundaries of the firm, or through market governance structures, i.e. in the open market (Williamson, 1981). This theory is a starting point for other approaches.
First, the internalisation/transaction cost approach argues that licensing can reach customers abroad. But in the perspective, the multinational firm would usually prefer to 'internalise' transactions via direct equity investment rather than license its
capability. The internalisation perspective is closely related to the transaction costs, which decide on whether to enter a foreign market through internalisation within its own boundaries or through collaboration with an external partner. Both perspectives are concerned with the minimisation of transaction costs and the conditions
underlying market failure.
Second, the resource-based theory draws on the assumptions that in order for a firm to sustain its competitive advantage its resources must be heterogeneous and
immobile (Barney, 1991). The traditional marketing approach reflects the common marketing focus on firm´s core competences combined with opportunities in the foreign environment. Hence, the firm must possess a 'compensating advantage' in order to overcome the 'cost of foreignness'.
Many of the selected studies and articles in the context of internationalisation refer to one of these approaches and often the constructs of the researched models apply to competition. Porter´s five forces model (Porter, 1980) is a general approach, which identifies and analyses five competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths. These forces are: Competition in the industry, potential of new entrants into the industry; power of suppliers, power of customers and threat of substitute products. It is frequently used to identify an industry's structure to determine corporate strategy.
Firms own value position regarding its elements of the business model has also to be considered in order develop a strategy and align firm´s capabilities and
resources. Based on the generic orientation of strategy (Porter, 1986), firms have different strategic options and internationalisation can be an important element to support a firm´s overall strategy.
But also the so-called eclectic paradigm, also known as Dunnings´s “Ownership, Location, and Internalization Model” (Dunning, 1988) is often named in this context. An eclectic paradigm can be understood as a theory that provides a framework for a company to follow when determining if it is beneficial to pursue direct foreign
investments in order to explain the internationalisation mainly of MNEs its business (Dunning and Lundan, 2008). This holistic approach combines together ownership (O), location specific (L), and internalization (I) factors in an eclectic paradigm of international production, known also as OLI paradigm and is based on the
assumption that for a direct investment in a foreign country to be beneficial, there must be a comparative advantage, an ownership advantage and an internalization advantage (Dunning, 1988). As a result, the main factors described above have been integrated into this approach in order to examine the totality of the relationships and interactions of the different components.
According to Dunning (2000), one of the main targets is to find out whether the
existence of a comparative advantage leads to executing particular functions within a specific nation. These thoughts are used often in the context of resources with
respect to costs and availability when comparing one location against another.
Ownership benefits can be topics around naming, copyright or patent rights including existing trademarks. Furthermore, the management of existing internal skills
compared to those that can be used in a foreign market can also be considered as internalization advantages in Dunning´s OLI model.
According to Turcan and Carter (2003), this model supports the decision if it is best for an organization to produce the particular product itself or consider an outsourcing to a third party. In the context of internationalisation, it is sometimes more cost- effective for an organization to keep the execution of the work internal, and therefore, perform their activities out of a different market location. This is in
ties with local producers. If those local producers can meet the organization’s production needs at a lower cost, than the organization itself, the production is managed and performed by third parties.
With the help of Dunning´s eclectic paradigm it can clearly be explained that under imperfect market conditions, firms have an incentive to internationalize certain
activities. Ownership-specific advantages enable them to compete with local firms in foreign countries and the preference for direct investments over licensing and export results in location-specific advantages.
But this approach can be criticised with respect to its contributions in traditional small firm internationalisation research, as it has been developed on the
internationalisation of MNEs. Thus, it takes the multinational stage for granted and assumes perfect rationality, leaving many questions unanswered regarding the development process by which companies become multinational.
Also, Johansen and Vahlne´s (1977) Uppsala Stage Approach are often named theories in the context of internationalisation strategies. This explanatory framework suggests that each stage involves an increased commitment to international
activities and that the process of internationalisation is the consequence of the acquisition of experiential knowledge, in particular, market-specific knowledge, and of uncertainty associated with the decision to internationalize. The model
distinguishes four different steps of entering an international market. According to Holtbrügge (2005), they cannot be considered independently of a company’s situation, market and the market knowledge. The Upsala approach determines between no regular export activities (sporadic export), export via independent representative (export mode), establishment of a foreign sales subsidiary, foreign production/manufacturing.
From the knowledge–based view, the Uppsala stage process is based on
organizational learning as a key element and focuses on ´experience´ as the sole explanatory factor. Neither environmental factors, such as those relating to
competition, nor any company characteristics other than ´experience´ were considered in the model.
Turcan et al. (2003) evaluate this as a positive reduction. They argue that it leads to a powerful explanatory strength for explaining and describing the process for firms
that expanded abroad during a particular time period and at a certain stage in their internationalisation particularly at the example of Swedish MedTech SMEs.
Today, it can be still observed, that companies normally start their expansion in a psychic nearby market (Johanson and Vahlne, 2009). Market knowledge and control of resources is the existing base, which can be enhanced step by step. When the firm becomes more experienced and is prepared to acquire better resources, they expand to more distant markets.
But even if many firms still seemed to behave in accordance with the traditional pattern, Johanson and Mattson (1985) have indicated early, that the development of cooperative relationships with customers, suppliers or other business partners is another important factor. Their “network model of internationalisation” explains the influence of external actors or organisations on the internationalisation of a firm by comprising two dimensions, the degree of internationalisation with regards to the firm and with regards to the market.
Johanson and Vahlne (1990) enlarged their stage process model accordingly by adopting the network model and acknowledging multilateral influences on the international decision making of the firm.
In the following table four basic paradigms, which draw back to the 1970´s to 1980´s of the last century, summarize different approaches regarding the understanding of firm´s internationalisation.
OLI Paradigm Net-work approach
Stage approach Porter´s 5 Forces model mechanism An incentive to internationalize certain activities is based on comparative advantages regarding ownership, location and internalization and is therefore a source of heterogeneity Embeddedness and connectivity as social assets Experiential market specific knowledge as a source of stepwise international growth To identify an industry's structure to determine corporate strategy such as internationalisation by evaluating attractiveness and risk and own value position
Key Sources
Dunning Johanson & Mattson
Johanson & Vahlne
Porter
Year 1988 1985 1977 1980
Table 4: Approach to internationalisation (based on Turcan and Carter, 2003 p.13).
The research on the internationalisation of a firm and the development of an
appropriate framework still goes on. Some scholars observed so-called “born global” companies that, from inception, seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries.
Their goal is to go through different stages of internationalisation suggested by stage models very rapidly or even start with international ventures from the very beginning. Oviatt and McDougall (1994) explained such a phenomenon very early in their
“International New Venture” approach, which draws from transaction cost,
international production, and resource-based theories. This approach is in alignment with the behavioural-based view and closely related to the field of international entrepreneurship. That is defined as a combination of innovative, proactive, and risk- seeking behaviour across national borders and is intended to create value in
organizations (Turcan et al., 2003).
Although export is only one characteristic of firm´s internationalisation, many
companies start with or are limited to export business and it can be understood that various factors influence their strategic decision-making and execution. A review concerning research articles in the context of export business (Leonidou and Katsikeas, 2010) shows the various facets of this subject matter. The subject of overall export strategy was most often examined in conjunction with antecedents (e.g., environmental, firm, or product) and/or outcomes (e.g., export performance) of marketing strategy standardization or adaptation. But also export products in the context of standardization versus adaptation was a dominant topic, followed by branding strategy and new product development, export pricing/financing and export distribution/logistics have traditionally been an attractive subject for many export researchers.
All of the research in this context has something in common. Their research objects are not companies and their business with respect to domestic markets. The
goods of a country is called export trade. Foreign trade is trade between different countries, it is also called international trade. Sometimes, particularly if the foreign partners are perceived to be far away or the transaction requires a shipment over an ocean the term overseas is used as a synonym. This research is focussing on the internationalisation of German SMEs. Hence, international and export are meant to describe all non-domestic business ventures, foreign and overseas are understood in the context that the business partner is not located nearby, which can mean a geographical distance as well as a related cultural distance.