As the world becomes more of a global village, internationalisation has gained much discussion in recent years. What is internationalisation, exactly? How can an international firm enter new markets? What are the advantages and disadvantages of expanding internationally? In today's explanation, we will find out.
What is internationalisation?
Internationalisation is the process of a company branching out to foreign markets to capture a greater market share. The trend towards internationalisation contributes to globalisation - the state where economies worldwide become integrated due to cross-border trade and investments. Internationalisation may require companies to adapt their product features and branding to match the cultural and technological needs of the local market.
How to operate in international markets?
Let's take a look at how businesses can operate in international markets.
Drivers for internationalisation
Four main reasons for a business to expand its operations abroad are:
Achieve growth: the local market may have a limited customer base or become saturated over time, expanding overseas is the only for businesses to increase their market share and continue growing.
Improve profitability: international businesses can take advantage of marketing and technological advantages in the host country or introduce higher prices to new customers to achieve higher profits.
Spread the risk: by going international, the business can lessen its redundancy on one market or customer base. In case of a market failure or a shift in customer behaviour, it can still rely on other operations elsewhere for survival.
Increase competitiveness: companies operating overseas have greater economies of scale to lower the cost of their business and be more competitive. The presence on a global scale also boosts the company’s reputation and allows it to attract more customers compared to local businesses.
Factors determining the attractiveness of international markets
In most cases, the attractiveness of a foreign market is assessed based on six factors:
The size and expected growth of the market
The accessibility of the market (geographical, political, legal, technological, social barriers)
The compatibility of different markets in the company’s portfolio
Resource availability and the distance to the target market
Competitive environment
External influences (PESTLE)
Reasons for producing products abroad
Offshoring is the process of moving a company’s production abroad.
The strategy is often adopted by international firms to achieve a cost advantage through a cheaper labour force and lower taxes. The company may also consider offshoring to reduce the pressure on the local resources.
That said, offshoring can reduce product quality or brand image.
Some global companies suffer from a reduced reputation due to underpaying local workers in developing countries. There are communication, cultural, logistical issues or low-skilled workers that reduce the business efficiency and product standards.
When the company realises the real cost of offshoring outweighing the advantages, it will consider ‘reshoring’ - the return to producing the products locally.
How does an international company enter new markets?
Typically, there are five ways a business can enter a market:
Export: The business produces the products locally and sells them abroad. This is the most popular and least risky method of becoming an international business.
Direct investment: The company setups manufacturing overseas or takes over or merges with a foreign business. Although direct investment allows the business to cut down on tax and transportation costs, it’s also the highest risk and most expensive option out of four market entry modes.
Licensing: The original business licenses other firms to manufacture and sell its products. The licensee pays a fee to reserve a trademark of the licensor’s products.
Franchising: Franchising is the same as licensing, only that the original business still has some control over the manufacturing and marketing processes of the licensees. This approach is much more economical than setting up a foreign facility or taking over the local business.
Joint ventures: The company partners with an overseas business to take advantage of its know-how upon entering a new market.
To learn more, check out our explanation on Sourcing Resources and Entering New Markets.
What are internationalisation models?
When carrying out internationalisation processes, these four models help managers to make better decisions:
1. Uppsala internationalisation model
Uppsala model is the internationalisation model of successive market entry where firms use past learning and experience in established markets to intensify their commitment to the new market.
According to the Uppsala theory, firms should enter new markets with successively greater psychic distance.
Psychic distance refers to cultural, language, and political differences between countries.
The idea is that approaching regions with a closer psychic distance first will equip the firm with knowledge and resources to conquer more complex markets.
Figure 1 shows the four successive stages of the internationalization process:
Figure 1. Steps of Internationalisation, StudySmarter1
2. Transaction cost approach
The transaction cost approach states that firms should internationalize in a way that incurs the least foreign trade costs. If the cost of setting up a joint venture is lower than the traditional selling/buying between countries, the company should initiate internationalisation processes. Otherwise, it’s better to stay domestic.
The transaction cost approach is carried out based on two assumptions: bounded rationality (act with incomplete information) and opportunistic behaviour (act for one's interest).
The choice of market entry mode, in this case, depends on the nature of the market. In the perfect market conditions, companies can choose a low-control entry mode such as exporting or licensing as partners are replaceable. In imperfect markets, other higher-level entry models such as joint ventures should be adopted to prevent opportunistic behaviours.
3. Dunning eclectic approach
Dunning electric approach is an approach for entry mode selection that takes into account the ownership advantage, location advantage and internationalisation advantage.
Companies should internationalize only when all three of the following conditions are met:
Ownership advantage: the company has more advantages thanks to its owning facilities abroad. The advantages could be tangible (lower production costs) or intangible (know-how).
Location advantage: the location comes with many favourable factors such as labour, energy, transportation, material source, etc. compared to the traditional model of selling abroad such as exports.
Internationalisation advantage: it's more profitable for the firm to explore advantages in new markets rather than selling to a foreign company.
4. The network approach
The network theory is drawn on the fact an international company should not act separately but must form a network of connections with other firms in the industry. This way, it can gain valuable insights and resources to advance its move to foreign markets.
Figure 2 shoes three ways a firm can integrate itself into an international environment:
A domestic enterprise establishes a foreign business network.
A domestic enterprise builds a foreign business network outside of the target market.
A group of domestic enterprises works together to enter a new market.
Figure 2. International network approach - StudySmarter
How to manage an international business?
Bartlett & Ghoshal Matrix is a framework for determining the type of international strategy pursued by a business based on two criteria: global integration and local responsiveness.
A high level of global integration means that the business wants to try to reduce costs as much as possible through standardized products and economies of scale. On the other hand, a high level of local responsiveness indicates a business's tendency to adapt its products and services to local needs.
These two factors create four types of international strategy: global strategy, transnational strategy, international strategy, multi-domestic strategies.
Figure 3. recaps the different types of international strategies and their characteristics.
| Local responsiveness |
Low | High |
Global integration | High | Global strategy | Transnational strategy |
Low | International strategy | Multi-domestic strategy |
Figure 3. Types of International Strategy
How does internationalisation impact different functions of business?
Internationalisation can affect various business functions, including human resources, finance, marketing, operations, and management.
Here's a more detailed breakdown with examples:
Human resources
Internationalisation processes can lead to changes in the Human and Resources department of the company.
- Managers may need to go under training or get advice from advisors to hire an international workforce.
- Multinational companies may also face cultural and legal problems when hiring and motivating foreign workers.
- Offshoring may trigger resentment among underpaid workers in developing countries.
- Licensing and franchising may require the company to develop thorough training programs to maintain the quality and culture of the original business.
Finance
The expansion to other territories requires a substantial investment which incurs many risks for the international business.
- Setting up a manufacturing facility broad or acquiring a foreign business can take up a lot of financial resources. However, there’s no guarantee this will generate a positive return.
- Offshoring can reduce costs of production but there might be hidden costs when the company switched back to producing locally.
- Franchising, licensing, and exporting are much less risky ways in terms of finance for a global business.
Marketing
A lot of marketing decisions are associated with the internationalisation process.
- Extensive market research has to be carried out to ensure the product is needed abroad Some customers may prefer a product made in a certain country than the other, e.g. Made in the UK.
- Introducing new products to a foreign market also uses up a considerable amount of market. There are also marketing costs to competing with businesses in the host country.
Operations
The method of becoming an international business can have an effect on operations management.
- When offshoring is adopted, the product manager must ensure the product quality is as good or better than when produced locally.
- A multinational business may need to carry out more collaborative work to ensure cohesion in the processes and culture of all markets around the world.
Management
One major challenge of an international business is to manage change in an effective and coherent manner.
Examples of internationalisation
Let's take a look at the international strategies of some famous corporations worldwide:
McDonald's
Started as a humble brand selling hamburgers, McDonald’s had grown into a successful multinational company with 39,000 locations in over 100 countries. The company’s internationalisation strategy is based on franchising, the practice of granting a business operation (franchisee) to market the company’s products. Around 93% of restaurants are operated by independent local business owners.3
Nike
Nike’s first move to internationalisation began in 1975 when it opened its first office in Taiwan. It now has branches all over the world. Like other multinational companies, Nike shoes, apparel, and other accessories are not made in the US but outsourced to lower labour cost countries in Asia and Latin America. As of today, the company has over 700 plants in 42 countries.4
Starbucks
Starbucks is a multinational chain of coffeehouses headquartered in Washington. For 50 years, the company has successfully branded itself in 83 countries with 32,938 stores opened. Part of Starbucks’ success lies in its ability to adapt to the culture and infrastructure of the foreign markets. For example, in Japan, Starbucks’ coffeehouse resembles the traditional tea house of the Japanese. They also include matcha, the religious drink in Japan, to appeal to the local customers.
Advantages and disadvantages of internationalisation on business
Internationalisation has both positive and negative impacts on business operations and performance:
Advantages
There are various advantages associated with internationalisation activities:
The economy of scope and scale
Efficient use of resources
Cheaper production costs
Market expansion
Improved reputation
Diversification of activities
Knowledge increase
Product development
Operational flexibility and stability
As a company moves abroad, it may gain access to advanced technology to produce more goods with lower costs and increase its market share (economies of scale). With a wider market coverage, the company also enjoys a better reputation and maintains its standing in the market.
Not only that, experience in foreign markets helps the company to improve its operations at home. For instance, the access to new technology in the foreign market results in the upgrade of the IT system in the home country.
Other benefits include increased knowledge of global markets and trade practices, which gives the firm a competitive advantage in the international business setting.
Disadvantages
Two main negative impacts of internalization include:
Unforeseeable events such as natural disasters and plagues can result in a negative ROI for internationalized firms. There are also cost-related risks such as decreasing demands in the foreign market which reduces the company's revenues.
For companies that enter multiple markets, challenges may arise from coordinating different markets into one unified ecosystem.
Processes for managing internationalisation
Figure 4. Entering a new market - StudySmarter
There are six stages for a company to enter a new market: 6
Step 1: Identify the motives for internationalisation: The first step is to find out your whys. The drivers for internationalisation may come from organizational factors and environmental factors.
Step 2: Conduct SWOT analysis: Once the motives are identified, you should conduct a SWOT analysis to find out your company’s strengths, weaknesses, opportunities, and threats.
Step 3: Decide on the product to sell in the foreign market: To choose a suitable product to sell abroad, pay attention to products with international appeals such as unique features, catchy names, or original designs.
Step 4: Choose the market to penetrate: After choosing the product, you should work out a place to market it. This is done through careful market research as well as weighing the pros and cons of all potential markets.
Step 5: Decide on entry mode: The next step is to determine how to enter a market. Overall, there are four common entry modes: exporting, licensing, franchising, and wholly-owned ventures.
Step 6: Determine the point of entry: The last phase concerns the timing of market entry. When would you enter the market and through which channels?
Internationalisation - Key takeaways
- Internationalisation is the process of a company branching out to foreign markets to capture a greater market share.
- There are four main models of internationalisation: Uppsala model, Transaction Costs Approach, Network theory, and Dunning Eclectic Approach.
- Positive impacts of internationalisation include economy of scope and scale, efficient use of resources, cheaper production costs, market expansion, improved reputation, knowledge increase, product development, and operational flexibility and stability.
- Negative impacts of internationalisation are increased risks and transaction costs, and increased costs in coordination and governance.
- The processes of internationalisation include 6 steps: identifying the motives, conducting a SWOT analysis, deciding on the product to sell, choosing the market, and determining the point of entry.
References
1. Radke-Kozłowska H, Network internationalisation of company as a form of international expansion, Studia Ekonomiczne. Zeszyty Naukowe Uniwersytetu Ekonomicznego w Katowicach, University of Economics in Katowice, Katowice, p. 196, 2015
2. Ratajczak-Mrozek, Milena, The network model of internationalisation, 2012.
3. McDonald Corp., Franchising Overview, n.d.
4. Sean Patrick Hopwood, How Nike Expands Globally – International Marketing, Day Translations Blog, 2019.
5. Knoema, Number of Starbucks Stores Globally, 1992-2021, 2021.
6. Moberg & Palm, The process of internationalisation in small and medium-sized enterprises, 1995.
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