Theories of internationaliation final part.pdf

# Host market development and entry modes Developing and entering foreign markets involves strategic decisions about market development options, entry modes, and the identification, selection, and management of partners or intermediaries [12](#page=12) [15](#page=15) [2](#page=2) [4](#page=4). ### 1.1 Host country market development options Companies can explore various host country market development options to expand internationally. These include direct approaches like opening company-owned stores or building a webshop, as well as indirect approaches utilizing local partners. The choice of option depends on a strategic evaluation of advantages and disadvantages for each [2](#page=2) [3](#page=3) [4](#page=4). ### 1.2 Entry mode options Selecting the appropriate entry mode is a crucial aspect of international market development. Options can range from direct foreign investment (e.g., wholly-owned subsidiaries) to contractual agreements and export-based modes. Each mode carries distinct advantages and disadvantages in terms of control, risk, resource commitment, and speed of market penetration [2](#page=2) [3](#page=3) [4](#page=4). > **Tip:** A thorough analysis of the specific product, target market, and company resources is essential when evaluating different entry mode options. ### 1.3 Finding partners and intermediaries Identifying suitable partners and intermediaries is key to navigating foreign markets. Companies often encounter unsolicited proposals from local intermediaries, but it is generally advisable to take a proactive and structured approach rather than simply reacting to these [13](#page=13) [2](#page=2) [4](#page=4). ### 1.4 Selecting partners and intermediaries The selection of local partners and intermediaries requires careful consideration and thorough due diligence. A poor choice can lead to significant costs in terms of both time and money. Essential criteria for selection include [12](#page=12) [13](#page=13) [2](#page=2): * **Financial soundness:** Intermediaries should be financially stable [13](#page=13). * **Good references and market knowledge:** Proven track record and deep understanding of the local market are vital [13](#page=13). * **Experience and network:** A strong existing network of representatives within the host country is beneficial [13](#page=13). * **Willingness to develop the market:** Intermediaries who are eager to grow the market for the product are preferred [13](#page=13). > **Tip:** Persuading an intermediary to carry your product requires a compelling sales pitch that instills confidence in your company and its offerings. Trust and rapport are fundamental to a successful partnership [13](#page=13). > **Example:** An example of matchmaking between a manufacturer and two potential partners is illustrated, highlighting the process of finding and evaluating suitable candidates [14](#page=14). ### 1.5 Managing partners and intermediaries Effective management of foreign partners and intermediaries is critical for sustained market growth [15](#page=15) [2](#page=2). #### 1.5.1 Role of foreign intermediaries Initially, local intermediaries are often engaged to reduce costs and minimize risks for the focal firm. They can be seen as a cheaper alternative to extensive market research. In situations of high uncertainty, an intermediary's complementary capabilities can substitute for the focal firm's need to develop its own capabilities for accessing host country markets [16](#page=16). #### 1.5.2 Bust scenario with foreign intermediaries A common pitfall is the "bust scenario," where focal firms adopt a reactive "beachhead strategy" and both parties invest minimally, assuming a temporary arrangement. When market penetration reaches a plateau, the focal firm often blames the local partner for perceived unreliability or failure to meet performance expectations. This leads to unmet expectations and a breakdown in the relationship, often exacerbated by a blame game [17](#page=17). #### 1.5.3 Boom scenario with foreign intermediaries Conversely, the "boom scenario" occurs when early success through a foreign intermediary leads the focal firm to regret not having managed the market directly. The typical reaction is to assert control, which can involve firing the agent or buying out the distributor to establish a wholly-owned distribution network. However, this often results in a disruptive and costly transition period [18](#page=18). > **Tip:** Understanding these potential scenarios can help firms proactively structure their partnerships and manage expectations to avoid common pitfalls. > **Example:** The concept of a "hockey stick effect" is provided as an illustration, which may relate to the growth patterns or challenges encountered in market development and intermediary relationships [19](#page=19). --- # International market selection and country analysis This section delves into the methodologies and theoretical frameworks employed by businesses to identify and select suitable countries for international expansion, focusing on assessing market attractiveness and competitive positioning. ### 2.1 Approaches to market scope and selection Choosing the right international markets involves various strategic approaches to defining the scope of market entry and selection processes. These can be broadly categorized into three theoretical frameworks: Process theory, Network theory, and Effectuation theory [21](#page=21). #### 2.1.1 Process theory Process theory emphasizes a proactive approach to market selection. It suggests that firms should first identify the best potential locations and then seek suitable intermediaries within those markets. This approach is rooted in a causation logic, where decisions are driven by a predictable future and a pre-defined goal [22](#page=22). #### 2.1.2 Network theory Network theory extends earlier process-based models, such as the Uppsala model, by highlighting the crucial role of a firm's external connections. Instead of solely relying on internal resources, this theory posits that international activities are enabled by relationships with other companies, including suppliers, customers, and partners [22](#page=22). #### 2.1.3 Effectuation theory Effectuation theory is particularly relevant for entrepreneurs operating in uncertain foreign markets. It focuses on decision-making based on affordable loss, leading to the creation of emergent strategies rather than strict adherence to a pre-defined plan. This involves a process of trial and error, leveraging existing resources and exploring emerging opportunities [22](#page=22). #### 2.1.4 Locational scanning methodology A practical methodology for selecting markets should be easily updatable, industry-specific, activity-based, and segment-oriented. The "KISS" principle (Keep It Simple, Stupid) is often advocated for ease of maintenance [23](#page=23) [24](#page=24). ### 2.2 The international locational decision-making process The process of making a successful international locational decision involves several key stages [26](#page=26): 1. **Assess internal ability to internationalize:** Evaluating the firm's readiness and capacity for global expansion [26](#page=26). 2. **Identify potential locations:** Brainstorming and initial identification of possible host countries [26](#page=26). 3. **Analyze and screen opportunities:** A more detailed assessment of the identified locations to filter them based on various criteria [26](#page=26). 4. **Evaluate entry mode:** Determining the most suitable method for entering the selected market [26](#page=26). 5. **Decide:** Making the final decision on the target international location and entry strategy [26](#page=26). International location decision-making is influenced by a combination of internal capabilities and external factors that create an advantageous context for a company's expansion. Potential opportunities can include accessing new markets, forming strategic foreign partnerships, acquiring target companies, or establishing low-cost or high-quality production facilities [27](#page=27). A critical aspect of this process is a realistic evaluation of whether a firm's resource base can be matched with the complementary resources available or developable in host countries. Internationalization inherently involves costs related to developing new capabilities, and these expected benefits and costs must be carefully considered [28](#page=28) [29](#page=29). ### 2.3 Dimensions of market/country attractiveness and competitive strength When analyzing potential international markets, two primary dimensions are considered: market attractiveness and competitive strength [30](#page=30). #### 2.3.1 Market attractiveness This dimension assesses the potential of a foreign market to generate profits and growth for the investing firm. Factors contributing to market attractiveness often include: * **Market size and growth rate:** Larger and faster-growing markets generally offer more potential [32](#page=32). * **Economic stability and development:** Predictable economic conditions and a certain level of development can reduce risk [32](#page=32). * **Political and legal environment:** A stable political climate and favorable legal framework are crucial [32](#page=32). * **Customer needs and preferences:** The degree to which the firm's offerings align with local demand [32](#page=32). * **Infrastructure:** Availability and quality of transportation, communication, and energy infrastructure [32](#page=32). #### 2.3.2 Competitive strength This dimension evaluates a firm's ability to compete effectively within a specific foreign market. It considers the firm's existing competitive advantages and its potential to build new ones. Factors include: * **Firm's market share and position:** Existing dominance or potential for gaining market share [32](#page=32). * **Brand reputation and recognition:** The strength of the company's brand in the target market [32](#page=32). * **Product or service differentiation:** Unique features or benefits that set the offering apart [32](#page=32). * **Marketing and distribution capabilities:** The firm's ability to reach and serve customers effectively [32](#page=32). * **Cost structure and operational efficiency:** Competitive cost advantages in production and operations [32](#page=32). #### 2.3.3 The market attractiveness/competitive strength matrix A common tool for visualizing and evaluating country attractiveness is the market attractiveness/competitive strength matrix. This matrix plots countries based on their scores on these two dimensions, typically dividing them into zones representing strategic options such as "invest/grow," "selectivity," or "harvest/divest". A questionnaire can be used to gather data for locating countries on this matrix [31](#page=31) [32](#page=32). > **Tip:** The market attractiveness/competitive strength matrix provides a strategic framework for prioritizing international markets, helping firms allocate resources effectively to opportunities with the highest potential for success and competitive advantage. #### 2.3.4 Example: Bosch Security Systems in the Middle East Bosch Security Systems used the market attractiveness/competitive strength matrix (MACS matrix) to evaluate its international market strategy (IMS) in the Middle East for fire detection systems. The process involved measuring and evaluating screening variables to determine the attractiveness and competitive strength of various countries within the region. This allowed Bosch to make informed decisions about market entry and resource allocation [33](#page=33) [34](#page=34) [35](#page=35) [36](#page=36). --- # Motives, triggers, and barriers to internationalization This section delves into the fundamental reasons driving firms to engage in international activities, the catalysts that initiate such endeavors, and the obstacles that impede them, with a specific focus on Small and Medium-sized Enterprises (SMEs) [43](#page=43). ### 3.1 Motives for internationalization Firms undertake international activities for several key reasons, broadly categorized as seeking markets or seeking resources [37](#page=37) [39](#page=39) [41](#page=41). #### 3.1.1 Market seeking A primary motive for initiating foreign operations is the desire to access new markets and capitalize on the sales potential they offer. While literature often emphasizes sales-oriented objectives, it's important to note that a significant proportion of firms engage in importing rather than exporting [37](#page=37) [39](#page=39). #### 3.1.2 Resource seeking Internationalization can also be driven by the need to acquire valuable resources from foreign markets. This encompasses [41](#page=41): * **Natural resources**: Such as agricultural produce and raw materials [41](#page=41). * **Components and parts**: Sourcing from foreign suppliers [41](#page=41). * **Low-cost labor**: Pursuing efficiency through lower labor costs [41](#page=41). * **High-skilled labor and knowledge**: Aiming for strategic asset seeking, particularly for research and development (R&D) and innovation [41](#page=41). ### 3.2 Triggers of internationalization Triggers are factors that initiate a firm's internationalization process. They can be categorized as proactive (pull factors) or reactive (push factors) [45](#page=45). #### 3.2.1 Proactive triggers / Pull factors These are internal initiatives driven by the firm's perception or strategic decisions. * **Internal**: * New trend perception [45](#page=45). * Hiring of new personnel, such as a CEO or manager, who brings international experience or vision [45](#page=45). * The extension of sales for products with seasonal demand [45](#page=45). #### 3.2.2 Reactive triggers / Push factors These are responses to external stimuli or market conditions. * **Internal**: * Overproduction [45](#page=45). * Excess production capacity [45](#page=45). * **External**: * The appeal of a foreign market [45](#page=45). * Anticipated market growth in a foreign country [45](#page=45). * Home market saturation [45](#page=45). * Actions of competing firms [45](#page=45). * Engagement with network partners [45](#page=45). * Unsolicited foreign orders, indicating existing demand [45](#page=45). * Government policies, such as foreign exchange (FX) rate fluctuations, can also act as triggers [45](#page=45). ### 3.3 Barriers to internationalization Barriers are obstacles that hinder a firm's ability or willingness to internationalize. These can originate from the home country or the host country, and are often internal or external to the firm [44](#page=44) [46](#page=46). #### 3.3.1 Home country barriers These are obstacles encountered within the firm's domestic environment. * **Internal**: * Insufficient finance [46](#page=46). * Lack of qualified staff [46](#page=46). * Insufficient productive capacity to meet foreign demand [46](#page=46). * Lack of market knowledge about foreign opportunities [46](#page=46). * Absence of foreign market connections or established networks [46](#page=46). * **External**: * Lack of government assistance and incentives to support international activities [46](#page=46). * Unfavorable foreign exchange (FX) rates [46](#page=46). * Cost escalation in production or logistics for foreign markets [46](#page=46). #### 3.3.2 Host country barriers These are obstacles encountered in the foreign market itself. * **Internal**: * Lack of finance to invest in the foreign market [46](#page=46). * Insufficient market information specific to the host country [46](#page=46). * Lack of assistance or incentives provided within the host country [46](#page=46). * **External**: * Unfavorable foreign exchange (FX) rates in the host country [46](#page=46). > **Tip:** For SMEs, barriers such as lack of finance, insufficient market knowledge, and lack of foreign market connections are particularly significant. Government support and favorable FX rates can significantly mitigate these challenges [46](#page=46) [47](#page=47) [48](#page=48). --- # Host country management and cultural differences Managing operations in foreign markets involves navigating significant institutional and cultural differences that impact business practices and leadership approaches. ### 4.1 Understanding host country management challenges Host country management requires careful consideration of what to watch out for in specific markets, primarily focusing on institutional and cultural differences. These differences have a direct impact on a company's product, approach, and overall strategy. Key considerations include discussing specific host country market development options, entry mode options, finding and selecting partners or intermediaries, deciding which countries to enter, and how to manage operations within those host countries [49](#page=49) [50](#page=50). #### 4.1.1 Layers of culture Culture can be understood as having different layers that influence behavior and decision-making. These layers include [51](#page=51): * **National culture:** This forms the broadest layer, encompassing nationality, ethnicity, gender, religion, social institutions, social class, and educational systems [52](#page=52). * **Company culture/Organizational culture:** This refers to the progressive socializations that occur during a person's life within an organization [52](#page=52). * **Business/Industry culture:** This layer is specific to professional fields like academia, business, banking, engineering, computer programming, legal, medical, and military sectors [52](#page=52). * **Individual behavior/decision-maker:** This is the most specific layer, referring to the individual actions and choices of a person [51](#page=51). #### 4.1.2 Levels of cross-cultural differences and management Cross-cultural differences manifest at various levels of interaction and business functions. These include [53](#page=53): * **Face to face:** This level involves direct interactions such as meetings, communication, and negotiation [53](#page=53). * **Company to company:** This encompasses relationships through contacts, alliances, joint ventures (JVs), and mergers and acquisitions (M&A) [53](#page=53). * **Company to customer:** This involves interactions related to marketing (e.g., the 4Ps), new product development, and understanding consumer preferences and demand quality [53](#page=53). Management of these differences requires attention to aspects like language, knowledge/expertise, behavior, rituals, organizational structures, hierarchy, decision-making processes, labor relations, and attitudes towards work [53](#page=53). #### 4.1.3 High- and low-context communication Cultural communication styles can be broadly categorized as high-context or low-context [54](#page=54). * **High-context cultures** emphasize establishing social trust first, valuing personal relations and goodwill. Agreements are built on trust, and negotiations tend to be slow and ritualistic. Examples include Chinese, Korean, Japanese, Vietnamese, Arab, Spanish, and Italian cultures [54](#page=54). * **Low-context cultures** prioritize getting down to business immediately, valuing expertise and performance. Agreements are detailed and legally binding, and negotiations aim for efficiency. Examples include English, North-American, Scandinavian, Swiss, and German cultures [54](#page=54). ### 4.2 GLOBE 2020 culture dimensions The GLOBE (Global Leadership and Organizational Behavior Effectiveness) study identifies several key cultural dimensions that influence societies (#page=56) [55](#page=55) [56](#page=56). #### 4.2.1 Core culture dimensions * **Uncertainty avoidance:** This measures how societies cope with uncertainty through established norms, rules, and bureaucracy [55](#page=55). * **Power distance:** This dimension reflects the degree of unequal distribution of power within a society [55](#page=55). * **Institutional collectivism:** This describes the extent to which a society encourages and rewards collective action and resource distribution [55](#page=55). * **In-group collectivism:** This refers to the strength of ties within small groups like families and close friends [55](#page=55). * **Gender egalitarianism:** This assesses the extent to which a society minimizes gender role differences and promotes gender equity [55](#page=55). * **Assertiveness:** This dimension indicates how aggressive and direct members of a society are in social relationships [56](#page=56). * **Future orientation:** This gauges the degree to which a society engages in future-oriented behaviors like planning and delayed gratification [56](#page=56). * **Performance orientation:** This measures how much a society encourages and rewards performance improvement and excellence [56](#page=56). * **Humane orientation:** This reflects the extent to which a society encourages fair, altruistic, generous, caring, and kind behavior [56](#page=56). * **General propensity to trust:** This dimension assesses the level of trust members of a society have in one another [56](#page=56). * **Religiosity:** This refers to the degree to which members of a society hold religious beliefs and practice religious rituals [56](#page=56). ### 4.3 GLOBE 2020 leadership dimensions The GLOBE study also outlines several leadership dimensions that are perceived as effective across different cultures [57](#page=57). * **Charismatic/value-based leadership:** This involves inspiring, motivating, and expecting high performance based on core values [57](#page=57). * **Team-oriented leadership:** This focuses on effective team building and achieving common goals [57](#page=57). * **Participative leadership:** This measures the degree to which managers involve others in decision-making processes [57](#page=57). * **Humane-oriented leadership:** This dimension reflects supportive, considerate leadership characterized by compassion and generosity [57](#page=57). * **Autonomous leadership:** This refers to independent and individualistic leadership attributes [57](#page=57). * **Self-protective leadership:** This leadership style prioritizes safety and security through status enhancement and face-saving [57](#page=57). * **Ethical leadership:** This dimension assesses the extent to which a leader practices and encourages ethical behaviors in followers [57](#page=57). * **Paternalistic leadership:** This style combines high discipline and authoritarianism with fatherly benevolence and high moral standards [57](#page=57). --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | International entrepreneurship | The process of identifying, evaluating, and exploiting opportunities for international expansion through innovation, risk-taking, and resourcefulness in a global context. | | Host market development | The strategic process of establishing and growing a company's presence and operations within a foreign country's market. | | Entry mode options | The various strategies and structures firms can use to enter a foreign market, such as exporting, licensing, franchising, joint ventures, or wholly-owned subsidiaries. | | Partners/intermediaries | External individuals or organizations that assist a firm in conducting business in a foreign market, such as agents, distributors, or joint venture partners. | | Field research | The collection of primary data through direct observation, surveys, or interviews conducted within the target foreign market to gain insights. | | Trade mission | An organized group of business people and government officials who visit a foreign country to promote trade and investment opportunities. | | Export assistance | Services and support provided by government agencies or other organizations to help businesses sell their products and services in foreign markets. | | Market research | The systematic gathering, recording, and analysis of data about markets and customers to facilitate decision-making in marketing. | | Due diligence | The process of investigating and verifying the background, financial stability, and market reputation of potential partners or intermediaries. | | Local intermediaries | Agents, distributors, or other entities operating within a host country that facilitate a company's market access and sales activities. | | Focal firms | The primary companies involved in international business activities, often seeking to expand their reach and operations into new markets. | | Beachhead strategy | An approach to market entry where a firm establishes a small, concentrated foothold in a new market with the intention of gradually expanding. | | Hockey stick effect | A graphical representation showing a rapid increase in performance or sales after a period of slow growth, often associated with successful market penetration. | | Process theory | A theoretical framework suggesting that internationalization is a gradual, sequential process of increasing commitment and knowledge of foreign markets. | | Network theory | A theoretical perspective that highlights the role of relationships and connections with other firms and actors in enabling and facilitating international activities. | | Effectuation theory | A theory of entrepreneurship that posits that entrepreneurs work with available resources and adopt emergent strategies to create future outcomes, particularly useful in uncertain environments. | | Causation logic | A decision-making approach where goals are pre-determined, and actions are taken to achieve them based on a predictable future. | | Locational scanning | The process of identifying and evaluating potential countries or regions for international expansion based on various attractiveness factors. | | KISS methodology | A mnemonic for Keep It Simple, Stupid; an approach to problem-solving or methodology design that emphasizes simplicity and clarity. | | International location decision making | The systematic process of choosing a foreign country or region for business expansion, considering internal capabilities and external market factors. | | Market attractiveness | The degree to which a foreign market presents favorable conditions for a company's products or services, including size, growth potential, and profitability. | | Competitive strength | A company's ability to compete effectively within a foreign market, based on its resources, capabilities, and strategic position. | | Market attractiveness/competitive strength matrix | A strategic tool used to assess and compare countries by plotting their market attractiveness against a company's competitive strength within that market. | | Internationalization | The process by which firms expand their operations and activities across national borders. | | Triggers | Factors that initiate or prompt a firm to engage in internationalization. | | Barriers | Obstacles or challenges that hinder or prevent a firm from internationalizing. | | Proactive triggers | Internal or external factors that initiate internationalization voluntarily, driven by strategic opportunity. | | Reactive triggers | Internal or external factors that compel a firm to internationalize in response to external pressures or changes. | | Push factors | Forces that drive firms to seek opportunities abroad, often due to saturation or limitations in the home market. | | Pull factors | Attractions of foreign markets that draw firms to internationalize, such as growth potential or unique resources. | | Institutional differences | Variations in legal, political, economic, and regulatory systems between countries that affect business operations. | | Cultural differences | Variations in shared beliefs, values, customs, and behaviors among people from different national or ethnic groups. | | High context communication | Communication style where meaning is conveyed through implicit cues, nonverbal signals, and shared understanding within a social context. | | Low context communication | Communication style where meaning is conveyed primarily through explicit verbal messages, with less reliance on implicit cues. | | GLOBE Culture Dimensions | A framework that identifies and measures cultural variations across societies based on nine dimensions, such as uncertainty avoidance and power distance. | | GLOBE Leadership Dimensions | A framework that categorizes and measures leadership styles and attributes across different cultures. |