Theories and models of internationalization

Uppsala model
The Uppsala model[1] is a theory that explains how firms gradually intensify their activities in foreign markets. It is similar to the POM model.[2] The key features of both models are the following: firms first gain experience from the domestic market before they move to foreign markets; firms start their foreign operations from culturally and/or geographically close countries and move gradually to culturally and geographically more distant countries; firms start their foreign operations by using traditional exports and gradually move to using more intensive and demanding operation modes (sales subsidiaries etc.) both at the company and target country level.

The Uppsala model also proposes that foreign sales begin with occasional export orders that are followed by regular exports; and the POM model states that the first sales object is physical product services, knowledge, and systems are possibly, but not necessarily later added to the sales objective.[3] Additionally, the POM model assumes that the first expansion in the sales object/product, operation and market strategy concerns expansion to new foreign markets.[3] Finally, the firm will not commit higher levels of resources to the market until it has acquired increasing levels of experiential knowledge and therefore the internationalization evolves stepwise at a relatively slow pace because of local market regulations and/or organisational learning. Uppsala model specifies that level of commitment may also decrease or cease if performance and prospect are not sufficiently met.

Note: commitment is defined in terms of the product of the size of the investment times its degree of inflexibility. While a large investment in saleable equipment does not necessarily indicate a strong commitment, unwavering dedication to meeting the needs of customers does.

Transaction cost theory

In a seminal article entitled The Nature of the Firm (Economica 1937), British economist Ronald Coase first developed the idea that because of market imperfections, certain economic actions (e.g. searches for information; bargaining; and/or policy enforcement) can become prohibitively expensive when a firm organizes them by means of shortterm contracts with outside partners. It therefore makes more sense for a firm to lodge

such activities internally instead of outsourcing them. Whereas external, market-based contracts are entirely focused on immediate profit maximization, firms are in a position to pursue a number of different long-term objectives, hence to accommodate activities that may be necessary but are not profitable per se. This has implications for the scope of activities that firms should undertake, both along the value chain and across borders. Many theorists have enhanced Coase's work over the years, most notably Oliver Williamson in the The Economic Institutions of Capitalism (Free Press 1985). The emphasis here was on firms' constant search to reduce overall costs, divided between production and transaction costs. By categorizing transactions according to their 'frequency', 'uncertainty' and 'asset specificity', and by making certain assumptions concerning actors' 'bounded rationality', Williamson provided a detailed key for the kinds of dealings that firms tend to organise either internally or externally. His insights were particularly relevant to the question of whether firms should enter foreign markets via exports or FDI, and whether they should

internationalize alone or with the help of a partner.

A number of useful insights can also be found in A. Rugman and J. D'Cruz's Multinationals as Flagship Firms: Regional Business Networks (Oxford University Press 2000). This text began by criticizing the excessively short-term nature of many academics' vision of firms as mere price-based organizations interacting as if they were not related. Instead of this, Rugman and D'Cruz used as their starting point Asian capitalism's success over the last few decades, drawing the conclusion that 'long-term competitiveness is more a question of entire business systems outperforming each other'. This insight has direct implications for the boundaries that any one firm might like to draw for its activities, thus for its market entry modes.

More specifically, Rugman and D'Cruz found that firms trying to go it alone face excessive pressure due to 'shorter product-technology cycles, rapid technology diffusion, quicker product obsolescence and the proliferation of quality producers'. Autonomous FDI can only really become a successful mode of internationalization if a firm has a realistic possibility of competing with host country rivals' existing operations; if the net benefits of the FDI - including the 'appropriability' advantage of keeping technology in-house - exceed benefits from other modes of penetration (exports, licensing, joint ventures); and if the FDI enjoys optimal timing and location. These are difficult conditions to meet, which explains why more and more firms see their own future as members of a group of firms - the point where 'transaction theory' crosses over into 'network theory'.

 Network theory

Found in several different disciplines, this theory, when applied in international business, views corporate actions like internationalization as the outcome of certain roles that a firm has been assigned within a global network of economic actors. In other words, to maintain their network of relationships (a prime objective in many organizations' strategic visions) firms are forced to undertake a number of measures.

In an article entitled The Strength of Weak Ties (American Journal of Sociology 1973), M.S. Granovetter proposed a theoretical variant arguing that membership in a social network influences managers' decisions as much as if not more than the abstract needs they face in the marketplace. This vision can be generalized to include internationalization, in the sense that a corporate decision to go abroad is as much a reflection of firms' sense of partners' expectations as of their own sense of what a particular situation requires.

A concrete supply chain example of this theory is the practice of 'follow sourcing', where suppliers who develop a good relationship with a buyer in one country internationalize so as to be able to service the same customer when it moves into another location. Follow sourcing is especially appropriate if the customer firm prefers a policy of global procurement, purchasing components from one and the same supplier for delivery to any one of its units worldwide.
c.f. Andersson, S. (2002), 'Suppliers' international strategies', in European Journal of Marketing, Volume 36, Number 1 / 2, available www.emeraldinsight.com, accessed 18 October 2007.

Some studies detect a network approach in the internationalization behaviour of SMEs who try to leverage their existing relationships with upstream and/or downstream partners in a way allowing them to reach new international customers. The problem for SMEs is that foreign expansion can overturn their existing organization, leading to the need for an extensive change management effort (see Chapter 9).
Boojihawon, D. (2006), 'International Enterpreneurship and Managing Network Dynamics; SMEs in the UK advertisings sector', Fai and Morgan (eds). Managerial Issues in International Business, Basingstoke: Palgrave MacMillan.

 Configuration school
This school of thought agues that when stable organizations feel a need to establish foreign operations, it is usually because 'revolutions' have affected the technologies they use, the competition they face or the political environment in which they operate. In this view, internationalization and similar strategies are little more than firms' reactions to changing external circumstances.
c.f. Nummela, N. et al (2006) 'Change in SME internationalization: an Irish perspective', in Journal of Small Business and Enterprise Development, Volume 13, Number 4, available at

www.emeraldinsight.com/, accessed 18 October 2007.

An example of this school is the way that some theorists attribute firms' tendency to cluster some of their more complex activities in specific locations to external factors like the 'forces of deregulation, globalization and advances in ICT', instead of to more internal factors like the search for intra-departmental knowledge spillovers.
c.f. Pandit, N. et. Al (2006), Towards an explanation of MNE FDI in the city of London financial services cluster, Fai and Morgan (eds), Managerial Issues in International Business, Basingstoke: Palgrave Macmillan.

Internationalization as a cultural behaviour

Associated with economic and business strategy analyses of internationalization are other more culturally-based visions that highlight the human variables underlying this type of corporate action. One of the leading contributors to this school is Nancy Adler, whose book International Dimensions of Organizational Behaviour (Thomson SouthWestern 2007) linked managers' cultural outlooks and their country of origin's stage of socio-economic development.

According to Adler, most of today's leading firms started out as ethnocentric, domestic organizations that expected foreign buyers to adapt to their existing product offer rather than the other way around. This was followed by a 'multidomestic' phase dominated by the idea that there were 'many good ways' of operating internationally, and that it was up to the firm to adapt its products and practices to the needs of customers worldwide.

The 1980s witnessed a 'multinational' when there was less of an emphasis on cultural sensitivity and more on minimizing costs via process engineering and seeking economies of scale. Lastly, the current 'global' phase combines a focus on production innovation with renewed cultural sensitivity. In this view, the decisions that a firm's management team takes at any one point in time are a reflection of its cultural

composition, and more specifically the extent to which it attaches value to multicultural principles instead of more singular ones.

In a similar vein, note Mathews and Zander's simple three-step 'discovery' model that begins with managers' discovery of new opportunities, their decision to deploy resources to exploit such opportunities; and finally different ways of engaging with competitors in their new markets. Where managers (and more broadly the firms for which they work) vary is in terms of the ease with which they transit from one stage of this model to the next.
Mathews, J. and Zander, I (May 2007), 'The international entrepreneurial dynamics of accelerated internationalization', Journal of International Business Studies, Volume 38, Issue 3.

Diamond model
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The Porter diamond[1]

The diamond model is an economical model developed by Michael Porter in his book The Competitive Advantage of Nations,[2] where he published his theory of why particular industries become competitive in particular locations.[3] Afterwards, this model has been expanded by other scholars.

Contents
[hide]

1 Porter analysis 2 Criticism 3 Double diamond model

4 See also 5 References

[edit] Porter analysis

The approach looks at clusters of industries, where the competitiveness of one company is related to the performance of other companies and other factors tied together in the value-added chain, in customer-client relation, or in a local or regional contexts.[2] The Porter analysis was made in two steps.[2] First, clusters of successful industries have been mapped in 10 important trading nations.[2] In the second, the history of competition in particular industries is examined to clarify the dynamic process by which competitive advantage was created.[2] The second step in Porter's analysis deals with the dynamic process by which competitive advantage is created. [2] The basic method in these studies is historical analysis.[2]The phenomena that are analysed are classified into six broad factors incorporated into the Porter diamond, which has become a key tool for the analysis of competitiveness:

Factor conditions are human resources, physical resources, knowledge resources, capital resources and infrastructure.[2]Specialized resources are often specific for an industry and important for its competitiveness.[2] Specific resources can be created to compensate for factor disadvantages.

Demand conditions in the home market can help companies create a competitive advantage, when sophisticated home market buyers pressure firms to innovate faster and to create more advanced products than those of competitors.[2]

Related and supporting industries can produce inputs which are important for innovation and internationalization.[2] These industries provide cost-effective inputs, but they also participate in the upgrading process, thus stimulating other companies in the chain to innovate.[2]

Firm strategy, structure and rivalry constitute the fourth determinant of competitiveness.[2] The way in which companies are created, set goals and are managed is important for success.[2] But the presence of intense rivalry in the home base is also important; it creates pressure to innovate in order to upgrade competitiveness.[2]

Government can influence each of the above four determinants of competitiveness.[2] Clearly government can influence the supply conditions of key production factors, demand conditions in the home market, and competition between firms.[2] Government interventions can occur at local, regional, national or supranational level.[2]

Chance events are occurrences that are outside of control of a firm.[2] They are important because they create discontinuities in which some gain competitive positions and some lose.[2]

The Porter thesis is that these factors interact with each other to create conditions where innovation and improved competitiveness occurs.[3]

[edit] Criticism

In his famous book, the competitive advantage of nations, Porter studied eight developed countries and two newly industrialized countries (NICs). The latter two are Korea and Singapore. Porter is quite optimistic about the future of the Korean economy. He argues that Korea may well reach true advanced status in the next decade (p. 383). In contrast, Porter is less optimistic about Singapore. In his view, Singapore will remain a factor-driven economy (p. 566) which reflects an early stage of economic development. Since the publication of Porter's work, however, Singapore has been more successful than Korea. This difference in performance raises important questions regarding the validity of Porter's diamond model of a nation's competitiveness. Porter has used the diamond model when consulting with the governments of Canada[4] and New Zealand.[5] While the variables of Porter's diamond model are useful terms of reference when analysing a nation's competitiveness, a weakness of Porter's work is his exclusive focus on the 'home base' concept. In the case of Canada, Porter did not adequately consider the nature of multinational activities.[6] In the case of New Zealand, the Porter model could not explain the success of export-dependent and resource-based industries.[7] Therefore, applications of Porter's home-based diamond require careful consideration and appropriate modification.

In Porter's single home-based diamond approach, a firm's capabilities to tap into the location advantages of other nations are viewed as very limited. Rugman[8] has demonstrated that a much more relevant concept prevails in small, open economies, namely the 'double diamond' model. For example, in the case of Canada, an integrated North American diamond (including both Canada and the United States), not just a Canadian one, is more relevant. The double diamond model, developed by Rugman and D'Cruz,[9] suggests that managers build upon both domestic and foreign diamonds to become globally competitive in terms of survival, profitability, and growth. While the Rugman and D'Cruz North American diamond framework fits well for Canada and New Zealand, it does not carry over to all other small nations, including Korea and Singapore.

[edit] Double diamond model

Porter (p. 1)[2] raises the basic question of international competitiveness: "Why do some nations succeed and others fail in international competition?" As its title suggests, the book is meant to be a contemporary equivalent of the wealth of nations, a new-forged version of Adam Smith's opus[10]. Porter argues that nations are most likely to succeed in industries or industry segments where the national 'diamond' is the most favorable. The diamond has four interrelated components: (1) factor conditions, (2) demand conditions, (3) related and supporting industries,

and (4) firm strategy, structure, and rivalry, and two exogenous parameters (1) government and (2) chance, as shown above. This model cleverly integrates the important variables determining a nation's competitiveness into one model. Most other models designed for this purpose represent subsets of Porter's comprehensive model. However, substantial ambiguity remains regarding the signs of relationships and the predictive power of the 'model'.[11] This is mainly because Porter fails to incorporate the effects of multinational activities in his model. To solve this problem, Dunning,[12] for example, treats multinational activities as a third exogenous variable which should be added to Porter's model. In today's global business, however, multinational activities represent much more than just an exogenous variable. Therefore, Porter's original diamond model has been extended to the generalized double diamond model[13] whereby multinational activity is formally incorporated into the model.

Firms from small countries such as Korea and Singapore target resources and markets not just in a domestic context, but also in a global context (Global targeting also becomes very important to firms from large economic systems such as the United States). Therefore, a nation's competitiveness depends partly upon the domestic diamond and partly upon the 'international' diamond relevant to its firms. The figure on the left side shows the generalized double diamond where the outside one represents a global diamond and the inside one a domestic diamond. The size of the global diamond is fixed within a foreseeable period, but the size of the domestic diamond varies according to the country size and its competitiveness. The diamond of dotted lines, between these two diamonds, is an international diamond which represents the nation's competitiveness as determined by both domestic and international parameters. The difference between the international diamond and the domestic diamond thus represents international or multinational activities. The multinational activities include both outbound and inbound foreign direct investment (FDI).

In the generalized double diamond model, national competitiveness is defined as the capability of firms engaged in value added activities in a specific industry in a particular country to sustain this value added over long periods of time in spite of international competition. Theoretically, two methodological differences between Porter and this new model are important. First, sustainable value added in a specific country may result from both domestically owned and foreign owned firms. Porter, however, does not incorporate foreign activities into his model as he makes a distinction between geographic scope of competition and the geographic locus of competitive advantage.[14] Second, sustainability may require a geographic configuration spanning many countries, whereby firm specific and location advantages present in several nations may complement each other. In contrast, Porter
[2][15]

argues that the most effective

global strategy is to concentrate as many activities as possible in one country and to serve the

world from this home base. Porter's global firm is just an exporter and his methodology does not take into account the organizational complexities of true global operations by multinational firms.[16]

Porter's narrow view on multinational activities has led him to underestimate the potential of Singapore's economy. Porter (p. 566)[2] argues that Singapore is largely a production base for foreign multinationals, attracted by Singapore's relatively low-cost, well-educated workforce and efficient infrastructure including roads, ports, airports, and telecommunications. According to Porter, the primary sources of competitive advantage of Singapore are basic factors such as location and unskilled/semi-skilled labor which are not very important to national competitive advantage. In actual fact, Singapore has been the most successful economy among the NICs. Singapore's success is mainly due to inbound FDI by foreign multinational enterprises in Singapore, as well as outbound FDI by Singapore firms in foreign countries. The inbound FDI brings foreign capital and technology; whereas outbound FDI allows Singapore to gain access to cheap labor and natural resources. It is the combination of domestic and international diamond determinants that leads to a sustainable competitive advantage in many Singaporean industries. Multinational activities are also important in explaining Korea's competitiveness. The most important comparative advantage of Korea is its human resources which have been inexpensive and well-disciplined. However, Korea has recently experienced severe labor problems. Its labor is no longer cheap and controllable. Major increases in the wages in Korea were awarded to a newly militant labor force in 198790, which lifted average earnings in manufacturing by 11.6 per cent in 1987, 19.6 per cent in 1988, 25 per cent in 1989 and 20.2 per cent in 1990.[17] Korea's wage level is now comparable to that of the United Kingdom, but the quality of its products has not kept pace. For the last several years, Korea's wage increases have been significantly higher than those in other NICs and three or four times as high as those in other developed countries. [18] Faced with a deteriorating labor advantage, Korean firms have two choices: (1) go abroad to find cheap labor; (2) enhance their production capabilities by introducing advanced technology from developed countries. In both cases, the implementation of these choices requires the development of multinational activities.

To sum up, multinational activities are very important when analyzing the global competitiveness of Korea and Singapore. In fact the most important difference between the single diamond model[2] and the generalized double diamond model[19] is the successful incorporation of multinational activities in the latter.