From CEOpedia | Management online

Internationalization is any type of business activity that the company undertakes abroad. It is connected with the increase of economic ties between specific countries and their regional groupings and enterprises.

Internationalization can be seen as an increase in involvement in international operations and creation of global marketing strategies. As such it is divided into internal - passive and external - active. Internal internationalization focuses mainly on international business interactions related to business operations, which is carried out on the domestic market. On the other hand, external internationalization, which is mainly focused on the market researchers, means that globalization of the enterprise takes place at various levels, and not only within the basic activity.

Internationalization is considered from three perspectives, namely:

Internationalization in terms of the process is characterized by a phased arrangement of its forms. They present the historical course of the internationalization process based on the experience of large international corporations. Using this theory, internationalization is interpreted as a development from a national enterprise through international to global.

Internationalization may be subject to:

  • exchangeable goods,
  • organization of an enterprise or only its elements,
  • participants in political, economic and cultural events,
  • structure or market situations.

The static approach consists in analyzing internationalization as an institutional phenomenon, characterizing it with the help of the enterprise's degree of independence in implementing the strategy and the use of indicators that are to illustrate the intensity of the company's internationalization.

In the case of a behaviorist approach, internationalization is considered through the prism of conduct of managers of international enterprises. According to HV Perlmutter, we distinguish four types of dignified conduct:

  • ethnocentric - where the company makes decisions only from the point of view of the headquarters,
  • polycentric - where the strategy is developed according to the criteria of the host country of the daughter,
  • regiocentric - where the company adjusts its activities to the base of a given region,
  • geocentric - where the enterprise in its activities strongly takes into account the global perspective.

Internationalization motives

This concept must be understood as the reasons that make the company decide to undertake activities outside the home country. Usually in such situations there are a number of motivations that push the organization to take steps towards internationalization, and among them always the overarching motif appears. Individual motifs are usually collected in different groups based on their similarity.

The most popular division distinguishes four groups of motifs. Here they are:

  • market - are related to the opening of new markets, but also to maintaining a position on previously occupied markets. They include such motives as: willingness to overtake competitors, strive to increase market share, desire to better adapt to the needs of recipients, willingness to reduce risk.
  • cost - these motives are related to lowering production costs and increasing profit. In other words, this group of motives is associated with the desire to increase the profitability of the company. This group includes: economies of scale, lower labor costs abroad, lower costs of raw materials, land, energy or tax breaks, cheaper loans, etc.
  • supply - related to the import of production factors when there are no or much higher prices in the home country. This group is characterized by such motives as: the possibility of access to mineral or agricultural raw materials, lower costs of conducting research (the need for research is not necessarily associated with having a highly qualified workforce), providing the workforce for the company's operations, supplying production factors.
  • political - here there are motives related to the policy carried out in relation to various forms of business activity both from the country of their origin and from the countries to which it is addressed. In this group, we distinguish: tax breaks, refund of duties, export credit insurance, granting loan guarantees on good terms, political stability.

Another very popular division of the internationalization motives of an enterprise is to group them into motivating, attracting and factors of opportunity and entrepreneurial factor.

Strategies of entering the enterprise on the foreign market

In the literature, different classifications of entry strategies can be found, which are based on different criteria. Among them, the most frequently mentioned are:

Some authors treat the problem in a slightly different way. For example, L.Berekoven and HG Meissner see entering foreign markets as a process and propose a phase model of internationalization. In this approach, the process is linear and starting from the most basic and simplest forms, through more complex ones, reaching to the highest degree of internationalization, possible ways to start foreign expansion are presented.

Export is the simplest, but also usually the first form of enterprise entry strategy for the foreign market. We distinguish two types of export: indirect and direct.

The first of these, indirect export , refers to the sale of products offered by the company to a specific intermediary, which is usually a domestic exporter or foreign importer, in order to further resell the goods on foreign markets. Such an intermediary may be a domestic foreign-oriented company with various formal and legal scope. A considerable facilitation is the possibility of using the experience, sales channels or foreign contacts of another domestic producer. As an advantage, we can consider low costs and low risk as well as no need to have experience in foreign markets. Despite the cooperation with a foreign recipient, the degree of internationalization of activities in the form of indirect exports is small. Such an appraisal is due to the fact that there is no actual confrontation of the company with the foreign market, its surroundings, customers or agents in the target country of sale.

The second type of export is direct export . It differs from indirect export in that the company omits the role of a domestic intermediary in its activities and undertakes all the classical activities related to foreign trade on its own. It is the responsibility of such an exporter to know the market, select the recipient in the target country, establish contact, conduct negotiations and sign a contract resulting from them, create and maintain documentation, plan and organize distribution, etc. Export in this form enables the organization to establish direct contacts with a given client and to shape the selected segment of the foreign market according to the principles set by it, in accordance with the chosen strategy and vision. In addition, the company has full control over the sale of products and the possibility of a quick response in the event of modifications of activities to be able to adapt to the requirements of the foreign market. In this way, the company has the chance to personally create its image. However, in contrast to indirect export, such a functioning is associated with considerable expenditures. One should take into account much higher costs of organizing export activities, greater requirements, risk and responsibility related to entering the market with a different nature of the environment than previously known, domestic ones.

The sale of licenses is another form of entry into the new foreign market of the company consisting in transferring the right to use the brand, product, know-how, patent, etc. for a fixed price, to a foreign partner who starts production in his country on this basis. Such a strategy allows for relatively quick entry into the foreign market without incurring investment outlays. Sales of licenses for manufacturing products abroad are usually used by companies that for some reason have limited export possibilities.

Another, license-like form is franchising . Such a form consists in the sale by the franchisor to the foreign partner of the entire marketing program of the company, which includes in particular: product ideas, its implementation, rules of production, sales, recipes, methods of production, in a word, everything that is associated with the company's core business. In this way the franchisor can quickly enter the market without incurring investment outlays and with little risk, while having full control over the franchisee's actions.

A joint venture is definitely a more advanced form of entering an enterprise on the foreign market, considered as capital expansion. It is implemented in the establishment of a joint venture by partners from at least two countries, on the basis of legal regulations in the country where the company is established. The joint venture is considered a very attractive form of entering the market . She has a good knowledge of the environment in which she is supposed to function. In addition, the risk can be divided among partners, which is important especially in politically unstable countries. What's more, such an arrangement allows the use of technology and the use of local raw materials, which is usually combined with an effective reduction of production costs. Other advantages include the circumvention of trade barriers and the allocation of costs between the enterprises involved. On the other hand, to the significant disadvantages of such an alliance, we can qualify communication problems that may arise during and a much slower decision-making process.

The most advanced form of entering the foreign market is having your own business . On the one hand, this form allows you to achieve the greatest international success, but on the other hand it involves the highest degree of risk among these forms. The basic benefits of owning a company abroad, regardless of whether it is a branch, a company or a daughter company, manifest themselves in the possibilities of fully independent management and deciding about development concepts or the strategy chosen.

Based on the presented considerations, it must be stated that the decision on whether to enter and how to enter the foreign market is one of the most important strategic actions of the company. Taking specific steps strongly affects the future of the organization. Concrete decisions on internationalization arise from internal premises, to which the company has an influence and external, on which there is no influence. Deciding on internationalization, the next logical step is to choose the form of entering the new market abroad. The options are many, and the choice of one of them always depends on the individual capabilities of the company.

Examples of Internationalization

  • Setting up a foreign office: Companies may open foreign offices in countries they are interested in doing business in. This provides them with a physical presence in those countries, allowing them to expand operations and build relationships. For example, Amazon recently opened an office in India to improve their e-commerce business in the country.
  • Developing international partnerships: Companies may also form international partnerships with foreign companies to give them access to new markets, resources, and technologies. For example, Microsoft has partnered with Japanese telecom company KDDI to develop cloud computing services in Japan.
  • Establishing joint ventures: Companies may also form joint ventures with foreign companies, allowing them to leverage each other’s strengths and resources to create new products and services. For example, General Motors has formed a joint venture with Chinese automaker SAIC to produce cars for the Chinese market.
  • Participating in international trade shows: Companies may also participate in international trade shows to promote their products and services to a global audience. For example, Apple annually attends the Consumer Electronics Show in Las Vegas to showcase their latest products.
  • Offering international shipping: Companies may also offer international shipping to customers around the world. For example, Amazon has recently expanded their Amazon Global program to offer international shipping to customers in over 100 countries.

Advantages of Internationalization

Internationalization brings a number of advantages to businesses that are willing to expand their operations abroad. These benefits include:

  • Increased Market Share: By expanding into new markets, businesses can gain access to a larger share of the global market, both in terms of potential customers and potential suppliers. This allows businesses to increase their sales and profits.
  • Cost Savings: By expanding into new markets, businesses can take advantage of lower labor costs, lower taxes, and other cost savings. This can help businesses reduce their overhead and increase their profits.
  • Increased Brand Awareness: By expanding into new markets, businesses can increase their brand awareness and recognition. This can help businesses in terms of marketing, advertising, and customer loyalty.
  • Access to New Resources: By expanding into new markets, businesses can access new resources, such as new technologies, new skills, and new talent. This can help businesses stay competitive and innovative.
  • Access to New Talent: By expanding into new markets, businesses can access new talent and skills, which can help them develop new products and services. This can help businesses remain competitive and stay ahead of the competition.

Limitations of Internationalization

Internationalization has its limitations, which must be taken into account before undertaking such a venture. These limitations include:

  • Language Barriers: Different countries have different languages and cultural practices, and this can create a barrier to successful internationalization. Companies must ensure that they invest in the right language training and resources so that they can effectively communicate with their international customers and partners.
  • Political and Economic Instability: In some countries, political and economic instability can create a risk when expanding internationally. Companies must research the political and economic climate of an area before investing and ensure their investments are protected in the event of an unforeseen change.
  • Increased Costs: Setting up operations in a new country or region can be expensive. Companies must ensure that their investments in internationalization are properly planned and budgeted for, to ensure that the venture is profitable in the long run.
  • Cultural Differences: Different countries have different cultural norms and values, and this can cause disruption if not taken into account. Companies must ensure that they are aware of the cultural differences and adapt their operations accordingly.

Other approaches related to Internationalization

Internationalization is a broad concept that can take many different forms, depending on the objectives of a company. Below are some of the other approaches that are related to internationalization:

  • Globalization: This approach is more focused on expanding the company’s operations beyond its home country and into other markets with an emphasis on utilizing the global economy.
  • Diversification: This approach involves expanding the company’s product and service offerings to other markets. It is also used to spread the risk of doing business in a single market.
  • Regionalization: This approach is focused on building a presence in specific regions or countries, such as the European Union, North America, or South America.
  • Localization: This approach is focused on adapting a company’s products and services to meet local needs and preferences.

Overall, internationalization is a broad concept that encompasses a variety of approaches that companies may use to expand their operations and reach new markets. Each approach has its own advantages and disadvantages, so it is important for companies to carefully consider which approach best meets their needs.

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