Why Do The Firms Internationalize?

Understanding the motives behind a firms decision to internationalize its business activities helps to explain why and how firms should engage its international business activities. In addition to the motive for internationalization, we need to understand the different modes of entering a foreign country or a region. There is no best way to enter a foreign market. Motives and Decision to Internationalize In addressing question of why certain firms are engaged in international business activities while others are not, researchers have focused on the elements stimulating a firms decision to initiate foreign market entry. Internationalization can be defined as those internal and external factors that influence a firms decision to initiate, develop, and sustain international business activities. Two factors lead the firms to consider the possibility of operating outside their home market: (i) Organizational Factors arising from within the firm and (ii) Environmental Factors which are outside the firms control. Organizational Factors Organizational factor can be split into two forces, (i) Decision making characteristics and (ii) Firms specific factors (i) Decision Makers Characteristics Recognition by the top manager, or the top management team, or the importance of international activities is an essential part of the process of internalization. Top managers or top management teams exposure to foreign market is a critical component in the decision to internationalize Management characteristics such as perceptions of risk in foreign operations have a strong influence on management perceptions of international business activities. Reid(1981) found the following characteristics positively influenced the internationalization decisions: Foreign travel and experience abroad(a) Managers who travel abroad extensively are more open minded and interested in foreign affairs, thus being more able and willing to meet foreign managers and form business partnership. (b) The managers also have more opportunities to observe first hand the advantages that foreign partnership and foreign countries
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may offer, have a foreign business network in place, and are able to attract and negotiate with managers from different cultures. Foreign language proficiency: The number of languages spoken by the top managers is a good indication of his or her interest in international activities. Managers who speaks several languages tend to travel more to foreign countries and thus are more able to establish social and business contacts, understand foreign business practices better, are better placed to negotiate a good deal for the company, and communicate not only with the top managers of foreign affiliates who could speak at the home countrys language but with line managers and employees as well. The decision makers background: Having been born abroad, lived abroad and worked abroad could influence ones view of risks and opportunities in foreign markets. For example international work experience exposes managers to foreign opportunities, and therefore, makes it easier for them to take the first step into foreign markets. Personal characteristics: Natural risk takers are more likely to engage in an international activity than risk averse managers. Similarly, managers with high ambitions tend to internationalize more than managers with low personal ambitions. (ii) Firm-specific Factors There are two firm-specific factors Firm Size: The size matters. Bigger firms tend to internationalize more than smaller ones. This is because large firms posses more managerial and financial resources, have greater production capacity, attain higher levels of economics of scale and tend to be associated with lower levels of perceived risks in international operations offered by the company. International Appeal: Production of a unique product or unique service with international appeal could act as a stimulus for international expansion. This is often demonstrated by the speed with which international sales are first obtained after start-up. The source of appeal could be the product or service offered by the company on the basis of their unique features and quality, or promotion through heavy advertising, sales promotion, and public relations. Nikes products, Levis jeans, Pepsi, Coca-cola, McDonalds products have all crossed global borders because of their international appeal. Environmental Factors
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The external business environment has a major impact on the strategic directions of a firm. Many external driving forces stimulate a firm to internationalize. Among the most important of these are: Unsolicited Proposals Some unsolicited proposals from foreign governments, distributors or clients are hard to resist and may stimulate a firm to internationalize. For example Volkswagen decided to enter the Chinese auto market after a Chinese delegation visited Volkswagens headquarters in Germany in 1978 and proposed a joint venture that had the blessing of Chinese government. Firms are now receiving unsolicited inquiries through their websites. For example, the first international contract of Indian software development firm Ekomate came from a British firm, which came across Ekomates website on the internet. After its first international encounter, Ekomate expanded into U.S. market. Ekomates clients and partners in the early 2000s include multinational firms such as IBM, Ford and Citibank. The bandwagon effect Competing firms tend to observe benchmark, evaluate, and imitate each others strategic moves, especially in industries with only a few big players. If one firm internationalizes, it is likely that others will follow its strategic move and create a bandwagon effect. Attractiveness of the host country Attractiveness describes the degree to which the countrys host market is desirable for business operations by foreign firms. Multinational firms may be attracted because of the host countrys market size. Market size is attractive to foreign firms because it offers greater potential for growth, profit, and stability of operations. In additions to market size, per capita income is a good measure of countrys attractiveness for market seeking multinationals. Customers in countries with high per capita income have high purchasing power, and high demand for industrial and consumer goods. Another factor that attracts foreign firms is favourable foreign investment regulations. How do The Firms Internationalize? (The Internationalization Process)
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 Johanson and Widersheim Paul, two Swedish researchers (1975) made two observations about the way in which firms internationalize. First, firms start exporting to neighbouring countries or countries that are comparatively well known or have relatively small psychic distance Psychic Distance is the some of the factors preventing the flow of information from and to the market (e.g cultural differences or differences in govt. regulations). In other words, a firms international expansion depends on its experiential knowledge of foreign markets. Experiential knowledge is knowledge obtained from experience. Second, firms expand their international operations step by step such as (i) no regular export activities, (ii) export activities via independent representatives or agents, (iii) the establishment of an overseas subsidiary and, (iv)overseas production and manufacturing units. In other words, a firms international expansion occurs as a result of incremental decisions. These two observations form the basis of Uppsala Model, which suggests that a firms international expansion is a gradual process dependent on experiential knowledge and incremental steps. The Uppsala Model (in Brief) The Uppsala Model suggests that a firms international expansion is a gradual process dependent on experiential knowledge and incremental steps. It assumes that firms proceed along the internationalization path in the form of logical steps, based on gradual acquisition and use of information gathered from foreign markets and operations, which determine successively greater levels of market commitment to more international business activities. The Born Global Firm (in brief) A Born Global firm has virtually no domestic market, internationalizes within a short period from inception, and generates most of its sales in foreign markets. The McKinsey report (1993) referred to these firms as Born Global Firms. One of the major characteristics of Born Global firms is the commitment of managers or founder to internationalization. Generally, Born Global Firms are managed or founded by

Reference: Global Strategic Management, Mellahi, Frynas and Finlay

people who have greater international exposure than managers of gradually internationalizing firms. Further, they generally have higher risk tolerance than managers of gradually internationalizing firms. Expand market Increase revenue\ Develop economies of scale Technology transfers