Managing the internationalization process
Learning outcomes
After reading this chapter, you should be able to: ➤ Understand the motives for internationalization. ➤ Apply the theories underpinning the internationalization process. ➤ Explain the Psychic Distance and Born Global concepts.

5

➤ Advise a multinational firm on choosing an appropriate entry mode for internationalization. ➤ Advise a multinational firm on de-internationalization.

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Opening case study Internationalization of a French retailer—Carrefour
In 1960, Carrefour opened its first supermarket in France. In 1963, Carrefour invented a new store concept—the hypermarket. The hypermarket concept was novel, and revolutionized the way French people did their shopping. It moved daily shopping from small stores to enormous stores where customers find everything they want under one roof, in addition to selfservice, discount price, and free parking space. The first Carrefour hypermarket store was established at the intersection of five roads—hence the name, Carrefour, which means ‘crossroads’. Carrefour is the leading retailer in Europe and the second largest worldwide, with

Exhibit A International development of Carrefour
Year Country and mode of entry No. of stores (2009) 1969 1973 1975 1982 1989 1991 1993 1993 1994 1995 1996 1997 1997 1998 1998 2000 Belgium—Carrefour’s first hypermarket outside France Spain Brazil—Carrefour’s first hypermarket in the Americas Argentina Taiwan—Carrefour’s first hypermarket in Asia Greece Italy Turkey Malaysia China Thailand Poland Singapore Colombia Indonesia Japan 120 2,241 476 518 59 544 494 578 16 443 31 303 2 59 43 0 57(HM), 63(SM) 162(HM), 96(SM), 1,972(HD), 11(CS) 162(HM), 39(SM), 267(HD), 8(CS) 67(HM), 112(SM), 339(HD) HM 31(HM), 209 (SM), 271 (HD), 33(CS) 66(HM), 236(SM), 178(CS), 14(C&C) 22(HM), 125(SM), 431(HD) HM 134(HM), 309(HD) HM 78 (HM), 225(SM) HM HM HM Formats

Note: HM = hypermarkets, SM = supermarkets, HD = hard discount stores, CS = convenience stores, C&C = cash and carry stores. Source: P. Kamath and C. Codin (2001), ‘French Carrefour in South-East Asia’, British Food Journal 103(7): 479–94; E. Colla and M. Dupuis (2002), ‘Research and managerial issues on global retail competition: Carrefour/Wal-Mart’, International Journal of Retail and Distribution Management 30(2): 103–11; and Carrefour’s website at http://www.carrefour.com/.

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more than 15,000 stores in thirty countries. In 2009, almost 55% of its revenues came from its international stores. In 1969, Carrefour opened its first hypermarket store outside France, in Belgium. Although French consumers welcomed the hypermarket concept, smaller stores lobbied against the spread of hypermarket stores in the late 1960s and early 1970s, and in 1973, the French legislature passed the Royer Law, which restricted the introduction of more hypermarkets. Carrefour had no choice but to expand internationally. It first moved to neighbouring European countries: Switzerland in 1970; Britain and Italy in 1972; and Spain in 1973. However, Carrefour soon withdrew from the Belgian and British markets, focusing mainly on southern European and Latin American countries where the distribution system was not yet modernized. In 1975, it expanded its format outside Europe, to Brazil. Carrefour’s internationalization strategy further accelerated in the 1980s and 1990s (see Exhibit A). Carrefour’s international strategy is based on the hypermarket format with local adaptability. For example, while the store format is the same anywhere around the world, the company sells hot meals to French customers in France and pasta in Argentina and Italy, and has sushi bars in most Asian countries. The success of Carrefour’s export of its hypermarket concept is due, at least in part, to its careful choice of countries and to its ability to adapt its format to local business environments. As shown in Exhibit A, most countries are emerging economies with a growing urban middle-class population that find the hypermarket concept appealing. The international concept of Carrefour is based on:

• A simple and clear idea. People in major cities prefer to do all their shopping under one roof. Carrefour’s logic is based on the belief that choice, self-service, free parking, and low prices have universal appeal. Although these principles might seem simple, the introduction of free parking in South Korea and Singapore was considered revolutionary, given the high cost of land in these countries. • Evolving ideas. Each hypermarket around the world is expected to keep reinventing itself to meet the demands of local customers. For instance, the company has introduced organic food in France, optical shops and tyre fitting in Taiwan, and petrol stations in Argentina.
As shown in Exhibit A, different formats are present in different countries. While the hypermarket model is the only format in emerging economies in South America (with the exception of Brazil and Argentina) and Asia, different formats exist in European countries. This is mainly due to: (1) planning restrictions on building hypermarkets in Western European countries; and (2) historical growth through acquisition of small outlets. In addition, in contrast to its standard entry mode by ownership, Carrefour entered several countries—the United Arab Emirates, Madagascar, Qatar, Romania, the Dominican Republic, and Tunisia—through a franchise partnership. Most Carrefour stores are still located in Europe. However, the importance of non-European markets has been steadily increasing. For instance, the number of Carrefour stores in Belgium fell from 483 to 120 in the ten-year period of 1999–2009, while the number of stores in Italy fell from 912 to 494. At the same time, the number of Carrefour stores in Brazil increased from 193 to 476, while the number of stores in China increased from 23 to 443.

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5.1

Introduction

Understanding the motives behind a firm’s decision to internationalize its business activities helps to explain why and how firms should engage in international business activities. For example, Carrefour was compelled to make its first international move in the 1970s because of the introduction of the Royer Law, which restricted its growth in France. Later on, it was attracted by opportunities in South American, Asian, and Middle Eastern markets. In this chapter, we discuss factors that push and pull firms to internationalize their business activities. In addition to the motives 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. For example, Carrefour’s mode of entry differed from one country or region to another. The company started its first international experience cautiously, expanding to countries it knew quite well and in moves which involved small risks. As it gained more experience in foreign markets and confidence in its ability to operate effectively outside its home market, its attitudes towards operating and risk in foreign markets changed. This resulted in further expansions into more challenging and unknown markets, such as the Middle Eastern and Asian markets.

5.2

Decision and motives to internationalize

In addressing the question of why certain firms are engaged in international business activities while others are not, researchers have focused on the elements stimulating a firm’s decision to initiate foreign market entry (Albaum 1983). Internationalization stimuli can be defined as those internal and external factors that influence a firm’s decision to initiate, develop, and sustain international business activities. Two sets of factors lead firms to consider the possibility of operating outside their home market: organizational factors arising from within the firm, and environmental factors which are outside the firm’s control (see Exhibit 5.1) (Aharoni 1966).

5.2.1

Organizational factors

Organizational factors can be split into two forces: decision-maker characteristics and firmspecific factors.

Decision-maker characteristics
Recognition by the top manager, or the top management team, of the importance of international activities is an essential part of the process of internationalization. The top manager’s (or top management team’s) exposure to foreign markets is a critical component in the decision to internationalize (Karafakioglu 1986; Jaw and Lin 2009). Management characteristics such as

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Exhibit 5.1 Factors behind the decision to internationalize

Firm’s decision to internationalize

Organizational factors

Environmental factors

Decision-maker characteristics

Firm-specific factors

Unsolicited proposals

'Bandwagon' effect

Attractiveness of host country

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 decision: • Foreign travel and experience abroad. 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 partnerships. They also have more opportunities to observe first-hand the advantages that foreign partnerships and foreign countries 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 manager is a good indication of his or her interest in international activities. Managers who speak 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 top managers of foreign affiliates who could speak the home country’s language but with line managers and employees as well. • The decision-maker background. Having been born abroad, lived abroad, or worked abroad could influence one’s 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.

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Firm-specific factors
There are two firm-specific factors: • Firm size. As will be discussed later, size matters, and bigger firms tend to internationalize more than smaller ones. This is because large firms possess more managerial and financial resources, have greater production capacity, attain higher levels of economies of scale, and tend to be associated with lower levels of perceived risks in international operations. Large Chinese firms such as the Haier Group (see closing case study) and the oil company Sinopec have internationalized much faster than smaller Chinese firms. • International appeal. Production of a unique product or service with an 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 concept as seen in the opening case study, or 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. Products like Nike shoes, Levi’s jeans, Pepsi, McDonald’s, and electronics products have all crossed global borders because of their international appeal.

5.2.2

Environmental factors

The external business environment has a major impact on the strategic direction of a firm. Many external driving forces stimulate a firm to internationalize. Among the most important of these are listed as follows.

Unsolicited proposals
Some unsolicited proposals from foreign governments, distributors, or clients are hard to resist and may stimulate a firm to go international (Wiedersheim-Paul et al. 1978). For example, Volkswagen decided to enter the Chinese auto market after a Chinese delegation visited Volkswagen’s headquarters in Germany in 1978 and proposed a joint venture that had the support of the Chinese government; Volkswagen later became China’s largest producer of cars (see opening case study, Chapter 10). Thanks to the Internet, firms are now receiving unsolicited inquiries through the firm’s website. For example, the first international contract of the Indian software development firm, Ekomate, came from a British firm, which came across Ekomate’s website on the Internet by accident. After its first international encounter, Ekomate expanded into the US market. Ekomate’s clients and partners subsequently included multinational firms such as IBM, Ford, and Citibank.

The ‘bandwagon’ effect
Competing firms tend to observe, benchmark, evaluate, and imitate each other’s strategic moves, especially in industries with only a few big domestic players. International expansion can provide a firm with competitive advantages vis-à-vis its competitors in the home market, for instance, by obtaining cheaper materials, new knowledge, or larger economies of scale. If

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one firm internationalizes, its competitors may fear being left behind if the internationalizing firm gains competitive advantages in foreign locations. Therefore, the internationalization of one firm may sometimes create a bandwagon effect among domestic competitors, that means, firms imitate the internationalizing firm’s strategic move to expand overseas (Knickerbocker 1973; Head et al. 2002; Gimeno et al. 2005). For example, US telecommunications firms internationalized at about the same time; indeed, seven different US telecommunications firms have made large investments in the local long-distance market in Mexico at about the same time (Gimeno et al. 2005). As another example, foreign banks that expanded to China imitated the competitive moves of their home country competitors (Kuilman and Li 2006).

Attractiveness of the host country
Attractiveness describes the degree to which the country’s host market is desirable for business operations by foreign firms. Multinational firms may be attracted because of the host country’s market size. Market size is attractive to foreign firms because it offers greater potential for growth, profit, and stability of operations. In addition to market size, per capita income is a good measure of a country’s 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. Other factors that attract foreign firms are cheap labour, availability of skills, and proximity to the market (Ferdows 1997; Vereecke and Van Dierdonck 2002).
KEY CONCEPT
Internationalization stimuli are those internal and external factors that influence a firm’s decision to initiate, develop, and sustain international business activities. Two sets of factors lead firms to consider the possibility of operating outside their home market: organizational factors arising from within the organization and environmental factors which are outside the organization’s control.

5.2.3

Motives for foreign investment

A company may simply decide to internationalize without investing in a foreign location. A company may benefit from an unsolicited proposal or a host country’s attractiveness by exporting or franchising to a foreign market (see section 5.5). Why would a company want to invest in a foreign location, given that a foreign investment is more expensive and riskier than exporting and franchising? According to John Dunning, there are four motives for establishing an investment in a foreign location (Dunning 1993; Narula and Dunning 2000): • Natural resource seeking. A company may seek to invest in a foreign country in order to obtain natural resources. • Market seeking. A company may seek to invest in a foreign country in order to service a large domestic market and adjacent regional markets, to overcome existing barriers to exporting to a country or to locate closer to customers.

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• Efficiency seeking. A company may seek to invest in a foreign country in order to decrease costs through cheaper labour or materials, to locate in a specific industrial cluster or to benefit from better integration of international activities. • Strategic asset seeking. A company may seek to invest strategically in a foreign country in order to obtain important knowledge resources, accelerate innovation, or learn from different consumer preferences. The first three motives primarily help a multinational firm to exploit assets in other countries by using the firm’s existing capabilities. The last motive—strategic asset seeking—serves to improve the firm’s capabilities through learning in foreign locations. Firms can have different motives for foreign investments. For example, Carrefour (see opening case study) was primarily market seeking, while the Haier Group (see closing case study) was primarily strategic asset seeking but the company was also market seeking.

5.3

The internationalization process

The previous section explained why firms internationalize (the internationalization stimuli). Once a firm decides to expand internationally, it must decide when and how to internationalize (the internationalization process).

5.3.1

Timing of market entry

The environmental factors in the previous section explain why many firms enter a market at a particular time: when a firm is approached by a customer; when competing firms enter an important market; or when a market is growing very fast. For instance, Carrefour decided to expand in emerging markets such as Poland and China at the very time when the economies of these countries were quickly expanding and consumers had increasingly more money to spend on shopping. Firms may also decide to enter a market at a particular time for wider strategic reasons. Previous research highlighted the strategic importance of the timing of market entry, suggesting that first movers in foreign markets perform better than later market entrants (Mascarenhas 1992, 1997; Isobe et al. 2000; Geng and Hon-Kwong 2005; Frynas et al. 2006). The concept of a first mover advantage suggests that pioneering businesses are able to obtain higher profits and other benefits as the consequence of early market entry (Lieberman and Montgomery 1988). Early entry into a foreign market can have five generic advantages (Kerin et al. 1992; Lieberman and Montgomery 1998; Frynas et al. 2006): • Cost advantages (e.g., allowing the firm to have larger economies of scale and accumulating experience about the foreign market before the entry of competitors). • Pre-emption of geographic space (e.g., pre-empting competitors by securing a specific geographic space or marketing channel).

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• Technological advantages (e.g., adapting products and processes to the local market and implementing new innovations before competitors enter the market). • Differentiation advantages (e.g., higher switching costs for buyers or reputational advantages of established brands). • Political advantages (e.g., the support of foreign government in raising barriers to entry for late movers). For instance, Lockheed Martin has been able to reap considerable first mover advantages by expanding into Russia in the late 1990s before the company’s competitors did so (see closing case study in Chapter 2). The entry into Russia greatly helped the company to gain a leading position in the global market for satellite launch services ahead of competitors. Lockheed Martin benefited from joint marketing of satellite launches with the best joint-venture partners available in Russia (pre-emption of geographic space), obtaining new technology from Russian joint-venture partners (technological advantages) and benefiting from the Russian and American government support in raising barriers to entry for late comers (political advantages) (Frynas et al. 2006). However, some studies suggested that there can also be considerable first mover disadvantages and early market entry does not automatically endow pioneers with higher profitability (Tellis and Golder 1996; Shankar et al. 1998; Shamsie et al. 2004). The timing of market entry is clearly as important as the firm’s ability to fully exploit the early market entry. Studies show that first mover advantages in foreign markets depend on several internal and external factors, including the strategic importance of an investment, the close linkage of an investment to core business activities, the rate of technological change in the industry, and the policies of the host country government (Isobe et al. 2000; Goerzen and Makino 2007; Frynas et al. 2006).

KEY CONCEPT
First mover advantages are benefits related to the ability of pioneering businesses to obtain profits as the consequence of early market entry. There are five generic first mover advantages: cost advantages; pre-emption of geographic space; technological advantages; differentiation advantages; and political advantages.

5.3.2

Obstacles to internationalization

Many companies have discovered that it can be very difficult to expand internationally, even if you offer a superior and cheaper product or service compared with your competitors. For instance, Carrefour faced government restrictions on opening hypermarkets in different countries, problems of adapting its organization to different national contexts, and logistical problems in countries with underdeveloped transport infrastructure. In 2008, some Chinese nationalists called for a boycott of Carrefour following controversial comments of the president of France about China, on the ground that Carrefour is a French-based company.

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Carrefour and other multinational firms are aware that expanding internationally can produce ‘liabilities’ Foreign companies may be disadvantaged by the government . (e.g., restrictions on investment), discriminated against by consumers (e.g., consumer boycotts), unable to transfer their competitive advantages to foreign markets (e.g., inability to replicate a low-cost base due to logistical problems), lack the essential knowledge to operate successfully in a country (e.g., lack of understanding of consumer preferences and distribution networks) (Cuervo-Cazurra et al. 2007). Studies show that internationalizing firms face additional costs in foreign markets, increased failure rates and problems of coordinating operations in different countries (Zaheer 1995; Hitt et al. 1997; Cuervo-Cazurra et al. 2007). The difficulties of internationalizing firms can be the consequence of at least four different types of ‘liabilities’: • Liability of foreignness. The difficulties as a result of the different norms and rules that constrain human behaviour, including culture, language, religion, and politics; companies may lack the knowledge and social networks to understand the different norms and rules of how to operate successfully in a foreign country (Zaheer 1995; Mezias 2002). • Liability of expansion. The difficulties as a result of an increase in the scale of a firm’s activities; domestic companies may also face problems of increased transportation, communication, and coordination as a result of expansion but these problems are usually greater for multinational firms because of the high costs of coordinating international operations (Hitt et al. 1997; Cuervo-Cazurra et al. 2007). • Liability of smallness. The difficulties as a result of small company size; in particular, smalland medium-sized enterprises (SMEs) may have fewer financial resources for foreign investments, limited information about the characteristics of foreign markets, a lack of human resources to conduct relevant business development work, and less negotiating leverage vis-à-vis potential business partners and foreign governments (Aldrich and Auster 1986; Child et al. 2009). • Liability of newness. The difficulties as a result of being new to a market; new domestic market entrants also suffer disadvantages compared with established firms but these problems are larger for internationalizing firms because they lack experience of foreign transactions or lack certain resources needed in foreign markets (Freeman et al. 1983; Cuervo-Cazurra et al. 2007). When Carrefour expanded in China, for example, it faced the liability of foreignness (Carrefour was targeted in a consumer boycott by Chinese nationalists in 2008 because it was a French company); the liability of expansion (Carrefour faced transportation, communication and coordination problems because of China’s vast geographical size, therefore it needed to establish eleven regional procurement centres); and the liability of newness (Carrefour did not initially know where to find the best local suppliers and how to deal with local government authorities, therefore it had to rely on the knowledge of local Chinese joint venture partners).

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5.3.3

Perceptions of managers

The previous section demonstrated that there are many objective reasons why it can be very difficult for companies to expand internationally. However, subjective perceptions of managers about foreign markets are often the key reasons why companies decide to expand internationally in a certain direction. Managers—like any other human beings—tend to avoid unfamiliar situations compared with familiar ones. They do not like uncertainty and prefer to invest in markets they are familiar with rather than in unfamiliar markets. Their decisions are influenced by their subjective perceptions of how easy it will be to operate in a new market. The concept of psychic distance helps to understand why these perceptions affect the internationalization process of firms. Psychic distance can be defined as the distance that is perceived to exist between characteristics of a firm’s home country and a foreign country with which that firm is, or is contemplating, doing business or investing (Child et al. 2009). High psychic distance (that is, subjective perceptions of large differences between countries) can discourage the firm’s international expansion into a given country because it generates uncertainties among business decision-makers. Despite the tendency of some previous studies to regard psychic distance as purely cultural differences (e.g., Kogut and Singh 1988), studies show that managerial perceptions are influenced by many different factors. Factors which influence managerial perceptions of psychic distance include: geographical distance, language, religion, education levels, levels of industrial development, logistics infrastructure, political systems, legal systems, and government regulations, among others (Johanson and Wiedersheim-Paul 1975; Ghemawat 2001; Dow and Karunaratna 2006; Child et al. 2009).
KEY CONCEPT
Psychic distance can be defined as the distance that is perceived to exist between characteristics of a firm’s home country and a foreign country with which that firm is, or is contemplating, doing business or investing. High psychic distance can discourage the firm’s international expansion into a given country because it generates uncertainties among business decision-makers.

5.3.4

Psychic distance and internationalization

An influential explanation of the internationalization process was offered by Swedish researchers (Johanson and Wiedersheim-Paul 1975; Johanson and Vahlne 1977, 1990). Johanson and his colleagues developed the proposition that internationalization proceeds through stages of decreasing psychic distance. Johanson and Wiedersheim-Paul (1975) made two observations about the way in which firms internationalize. First, firms start expanding to neighbouring countries or countries with small psychic distance. A firm’s international expansion depends on its experiential knowledge of foreign markets. Experiential knowledge is knowledge obtained from experience. By implication, there is a direct link between market knowledge and market commitment. The better the knowledge of a market, the stronger the commitment to that market.

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Second, firms expand their international operations step by step. In other words, a firm’s international expansion occurs as a result of incremental decisions. Johanson and Wiedersheim-Paul (1975) studied the internationalization process of four large Swedish multinationals, and found that the internationalization patterns of these firms were marked by a number of small incremental changes. They identified four successive stages in the firm’s international expansion: 1. No regular export activities. 2. Export activities via independent representatives or agents. 3. The establishment of an overseas subsidiary. 4. Overseas production and manufacturing units. These two observations form the basis of the Uppsala Model, which suggests that a firm’s international expansion is a gradual process dependent on experiential knowledge and incremental steps. Johanson and Wiedersheim-Paul’s (1975) work was further developed and refined by Johanson and Vahlne (1977), who formulated a ‘dynamic’ Uppsala Model—a model in which the outcome of one cycle of events constitutes the input to the next (see Exhibit 5.2).

5.3.5

The Uppsala Model

The Uppsala Model suggests that firms proceed along the internationalization path in the form of logical steps, based on their gradual acquisition and use of information gathered from foreign markets and operations, which determine successively greater levels of market commitment

Exhibit 5.2 The Uppsala Model

Market knowledge leads to

Market commitment leads to more

Market knowledge

leads to more

Market commitment

and so on

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to more international business activities. The concept of market commitment suggests that resources located in a particular market present a firm’s commitment to that market, so foreign direct investment means higher market commitment than exporting or licensing. Market commitment is composed of two factors: the amount of resources committed and the degree of commitment. The amount of resources refers to the size of investment in a given market. The degree of commitment refers to the difficulty of finding an alternative use for the resources and transferring them to the alternative use. The Uppsala Model assumes that the more the firm knows about the foreign market, the lower the perceived market risk will be, and the higher the level of investment in that market. The perceived risk is primarily a function of the level of market knowledge acquired through one’s own operations (Forsgren 2002). So, over time, and as firms gain foreign commercial experience and improve their knowledge of foreign markets, they tend to increase their foreign market commitment and venture into countries that are increasingly dissimilar to their own. This, in turn, enhances market knowledge, leading to further commitment in more distant markets. The model helps to understand a firm’s initial choice of international location and its mode of entry into foreign markets. For example, French firms such as Carrefour initially expand to other Western European countries such as Belgium and Spain, before making direct investments in Turkey, the United States, or China. At the same time, firms initially export to other countries or engage in strategic alliances with foreign firms, before committing capital towards wholly-owned foreign investments. It should be pointed out that there are three exceptions to the Uppsala Model. First, firms that have large resources and experience can take larger internationalization steps. This helps to explain why small—and medium-sized enterprises follow the Uppsala Model more closely than very large multinational firms. Second, when market conditions are stable and homogeneous, relevant market knowledge can be gained from sources other than experience. Third, when the firm has considerable experience of markets with similar conditions, it may be able to generalize this experience to any specific market.
KEY CONCEPT
The Uppsala Model suggests that a firm’s 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 the 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.

5.4

Criticisms of the Uppsala Model

Despite the intuitive appeal of the Uppsala Model, there is much concern about its current usefulness. The model does not explain what triggers the first internationalization step. The model largely explains the international expansion of firms in the early stages of

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internationalization and does not explain the behaviour of large established multinational firms that already have extensive international experience and operations across the world (Melin 1992). Above all, the Uppsala Model cannot explain why some firms do not follow the logical sequence of steps suggested in the Model and why some firms are born global from the start.

5.4.1.

Firms not following Uppsala Model

Multinational firms do not always expand in countries with low psychic distance before entering more distant countries. Sometimes, a firm’s international expansion is not the outcome of a learning process (as the Uppsala Model suggests), but the outcome of a rational strategic choice (i.e., a conscious choice to enter a specific foreign market). For example, if a European firm makes a deliberate decision to relocate its manufacturing production to a lowcost country, it may be more likely to invest in distant China than in a neighbouring European country. This helps to explain, for instance, why many Norwegian firms did not make initial foreign investments close to the home country and would not necessarily internationalize in incremental steps (Benito and Gripsrud 1992). Furthermore, the Uppsala Model may not always explain the international expansion of firms from emerging markets. Firms from countries such as China may seek to ‘catch up’ with established multinational firms through the accelerated learning that entry into psychically distant countries can entail. Studies show that companies from emerging markets seek to learn new skills or acquire new technologies from their strategic partners or their subsidiaries in psychically distant developed countries (Child and Rodrigues 2005; Lyles and Salk 2007; Liu et al. 2008). Therefore, some companies from emerging markets may take a strategic decision to expand to the United States or Europe as early as possible in order to enhance their capabilities.

5.4.2

The Born Global firm

There are firms which do not follow the traditional internationalization process at all, but which are multinational firms from the very start. In 1993, the consultants, McKinsey, published the findings of a survey for the Australian Manufacturing Council on the internationalization of small and medium firms in Australia (McKinsey 1993). The report put forward evidence that a large number of the surveyed firms in Australia viewed ‘the world as their marketplace from the outset and see the domestic market as a support for their international business’ (p. 9). One example of such a firm is Tyrian Diagnostics (see closing case study in Chapter 6). The McKinsey report referred to these firms as ‘Born Global’ firms. Other researchers observed the Born Global phenomenon, but used different terms to describe it, including international new ventures (McDougall et al. 1994; Oviatt and McDougall 1994), born internationals (Kundu and Katz 2003), and early internationalizing firms (Rialp et al. 2005a). In essence, the terms Born Global firm or International New Venture describes firms that, right from their birth, seek competitive advantage by using resources from different

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countries and by selling their products in multiple countries. The terms, Born Global firm or International New Venture, can be defined as: a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. The distinguishing feature of these start-ups is that their origins are international, as demonstrated by observable and significant commitments of resources (e.g. material, people, financing, time) in more than one nation. (McDougall et al. 1994: 49) Born Global firms generally share three characteristics (Knight and Çavusgil 1996; Kotha et al. 2001; Rialp et al. 2005b): • Company size. Born Global firms are usually small- and medium-sized enterprises (SMEs), which have recently started operations. • Hi-tech focus. Born Global firms are usually hi-tech firms that are able to offer very specialized products or services in global niche markets. The fact that they are hi-tech enables Born Global firms to sell their product or service to global customers with minimum adjustments. • Decision-maker characterictics. Born Global firms are managed or founded by people who have either greater international experience or access to better international business and personal networks, compared with managers of gradually internationalizing firms. In addition, the managers of such firms may have higher risk tolerance than managers of gradually internationalizing firms. Firms originating from small countries such as Nordic countries are more likely to adopt a Born Global strategy than firms from large countries such as the United States. For example, Lindmark et al. (1994) reported that nearly 50% of hi-tech start-ups in the Nordic countries began exporting within two years of establishment. The small size of the home market forces firms to sell their products globally from the start in order to be competitive.
KEY CONCEPT
A Born Global firm is a business organization that, within a short period from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in foreign markets.

5.4.3

Response to criticisms

The Uppsala Model cannot explain the expansion of Born Global firms. The criticisms of the Uppsala Model might therefore be thought to undermine the analytical contribution offered by the Model and the psychic distance concept. However, recent research suggests that there are relatively few Born Global firms, even among start-up technology firms (Lopez et al. 2009). Indeed, what the criticisms of the Uppsala Model actually undermine is the assumption that

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psychic distance generates uncertainties which business people are unwilling or unable to tackle (cf. Child et al. 2009). The attractiveness of some foreign markets in terms of their size, growth rate or technological development might be sufficient to offset, in the judgement of business decision-makers, the uncertainties and risks associated with psychic distance. This can help to explain why European firms seeking new markets or Chinese firms seeking new technologies jumped over stages in the Uppsala Model. Johanson and Wiedesheim-Paul (1975) themselves admitted that foreign market size may independently influence decisions in the internationalization process. Johanson and Vahlne (2009: 1421) point out: ‘There is nothing in our model that indicates that international expansion cannot be done quickly.’ Born Global firms and firms from emerging markets such as China also face the same problems of psychic distance like other firms (Child et al. 2002; Isenberg 2008). However, instead of expanding to psychically close countries first, these firms sometimes use different methods to help them cope with psychic distance. They use social networks, rely on a local agent or partner, hire local professionals, or expand in foreign cities with a high number of migrants from their country of origin, which in turn helps these firms to obtain tacit knowledge of foreign regulations, culture, and business practices (Zhou et al. 2007; Child et al. 2002, 2009). This does not necessarily suggest that the Uppsala Model and the psychic distance concept are out of date, but rather that smart managers may find ways of bridging distance and exploiting market opportunities (see Exhibit 5.3).

Exhibit 5.3 Internationalization of Three Hong Kong SMEs
SME #1 Electric Utilities SME #2 Banking SME #3 Food processing

Hong Kong

Hong Kong

Hong Kong

PR China

PR China

United States

Taiwan

Singapore

PR China

Thailand

United States

Malaysia

India

UK

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The figure above represents the first internationalization steps by three different small- and medium-sized enterprises (SMEs) from Hong Kong. SME #1—an electric utility firm—followed the Uppsala Model very closely. The firm expanded first to Chinese-speaking neighbouring territories, and then to other Asian countries. SME #2—a family bank—first expanded to two Chinese-speaking countries close to home; however, the company then expanded very quickly to very distant countries. SME #3—a food processing firm—appeared to defy the Uppsala Model and expanded first to the distant United States, before expanding closer to home. How can the internationalization of SME #2 and SME #3 be explained? The companies’ motives for investment allow some reconciliation with the psychic distance concept. In both cases, the overseas investments in the United States were established, not to cater to Western consumers, but to a large overseas Chinese community. In other words, the Chinese overseas community provided a ready market for the two firms. The managers’ perceptions were also crucial for their decision to expand in a distant country. The managers were less worried about the distance to the United States because of the presence of social networks (a trusted friend, a loyal staff member, or a local partner) among the Chinese community in the United States, who helped them bridge the psychic distance between Hong Kong and the United States. In the case of SME #3, the managers preferred the United States as they perceived the country to have a ‘stable’ environment, safeguarded by the rule of law. In other words, the managers did not perceive the psychic distance to be so large and they were able to find ways to bridge psychic distance between their home country and the host country.
Source: J. Child, S.-H. Ng, and C. Wong (2002), ‘Psychic distance and internationalization: evidence from Hong Kong Firms’, International Studies of Management & Organization 32(1): 36–56.

When companies expand internationally, business networks are the best method for bridging psychic distance. Business networks are much more important today than twenty or thirty years ago. The Uppsala Model was originally based on the assumption that a firm accumulates experiential knowledge through its own international expansion. However, the proponents of the Uppsala Model now admit that knowledge about foreign markets can often come from business networks: strategic partners, customers, suppliers, etc. (Johanson and Vahlne 2003, 2009). Business partners can provide information, for example, about the best local suppliers and how to deal with local government authorities. For example, when expanding in China, Carrefour initially relied on the knowledge of local Chinese joint venture partners to help the company bridge psychic distance. It is certainly true that the speed of international expansion is much faster today than twenty or thirty years ago. For instance, the Japanese company Matsushita waited for almost thirty years between the start of international exports and the establishment of an overseas plant. The Chinese company, Haier Group (see closing case study), achieved this step in less than ten years. It took Matsushita twelve years from building its first overseas plant to its first acquisition

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of a foreign company, while the Haier Group achieved the first acquisition after only five years. However, while Matsushita and the Haier Group started their international expansion at different times and at different speeds, their internationalization process was similar and broadly followed incremental steps (Yang et al. 2009). Recent studies provide evidence that the Uppsala Model and the psychic distance concept can still explain the international expansion of firms (Barkema and Drogendijk 2007), including new multinational firms from emerging markets (Elango and Pattnaik 2007; Erdilek 2008; Child et al. 2009; Yang et al. 2009). International managers cannot ignore issues related to psychic distance. Rather, they need to learn how to bridge psychic distance in order to speed up their firms’ international expansion.

5.5

Entry mode strategies

We have previously referred to modes of entry into foreign markets. When firms decide to enter a foreign market, they are faced with a large array of choices of entry mode, which could be grouped into five main categories: export, licensing, franchising, international joint venture, and wholly-owned operations. This section will only focus on four modes of entry, leaving aside international partnerships between firms. Because of the importance and complex nature of international joint ventures and strategic alliances, we have allocated a whole chapter to this issue (see Chapter 6).

5.5.1

Export

A simple definition of exporting is the action by the firm to send produced goods and services from the home country to other countries. This can be ascribed to the fact that exporting does not need the commitment of large resources and is thus less costly than alternatives such as joint ventures (Morgan and Katsikeas 1998). It is also easier for the multinational firm to withdraw its operations with minimum damage (see Exhibit 5.4). Because of the physical distance, however, the export strategy does not enable the multinational firm to control its operations abroad. Export is a frequently employed mode of internationalization and one of the simplest and most common approaches adopted mainly by small- and medium-sized firms in their endeavour to enter foreign markets. There are three different exporter categories according to firms’ level of export involvement: experimental involvement, where the firm initiates restricted export marketing activity; active involvement, where the firm systematically explores a range of export market opportunities; and committed involvement, where the firm allocates its resources on the basis of international marketing opportunities (Çavusgil 1984). As shown in Exhibit 5.4, generally firms export for two reasons. First, firms need experiential knowledge, and exporting has the potential to provide firms with international experience without their taking high risk or strong commitment. Second, firms use exporting to expand their sales in order to achieve economies of scale.

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Risks of exporting
Export strategy, compared with the other modes of entry, is a low-risk strategy. The major risks of exporting are: • When countries experience major political instability, export could be disrupted, with consequential delays and other defaults on payments, exchange transfer blockages, or confiscation of property. • The multinational firm has no control over some costs, such as costs of land transport to the port, transfers, shipping costs, insurance, and foreign exchange risk.

5.5.2

Licensing

International licensing is ‘the transfer of patented information and trademarks, information and know-how, including specifications, written documents, computer programs, and so forth, as well as information needed to sell a product or service, with respect to a physical territory’ (Mottner and Johnson 2000: 171). Licensing does not mean duplicating the product in several countries. Most products going into foreign countries require some form of adaptation: labels and instructions must be translated; goods may require modification to conform with local laws and regulations; and marketing may have to be adjusted. Benefits of licensing include speed to market, especially when a firm lacks sufficient skills, capital, or personnel to enter a foreign market quickly (see Exhibit 5.4). For instance, German home appliance manufacturers Liebherr and Bosch-Siemens entered several emerging markets such as China and Turkey through licensing agreements for manufacturing refrigerators and other white goods. In turn, emerging market firms such as the Haier Group of China (see closing case study) and Arçelik of Turkey used the foreign licensing technology to expand internationally through exporting. In addition to being used as an entry mode to foreign markets, licensing may also be used as a step towards a more committed mode of entry such as a joint venture or a wholly-owned form. For example, when in 1997, Phoenix AG, a German manufacturing concern, agreed to license the production of its automotive and railway components in India to Sigma Corp. of Delhi, the licence agreement was no more than a step towards establishing a joint venture, which would integrate Sigma’s manufacturing capability into Phoenix’s global strategy (Mottner and Johnson 2000).

Risks of licensing
Several risks are associated with international licensing. Mottner and Johnson (2000) identified the following risks: • Sub-optimal choice. This risk is associated with the possibility of licensing being not the best possible choice and or selecting the wrong partner—hence not realizing the full potential of the partnership. • Risk of opportunism. The possibility that the licensee takes the opportunity to appropriate the technology or process that has been licensed to it and internalizes it.

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Exhibit 5.4 Advantages and disadvantages of different modes of entry
Disadvantages • Hard to control operations abroad • Provides very small experiential knowledge in foreign markets

Mode of entry

Advantages

Export

• Does not require a high resource commitment in the targeted country

• Inexpensive way to gain experiential knowledge in foreign markets

• Low-cost strategy to expand sales in order to achieve economies of scale • Hard to monitor partners in foreign markets • High potential for opportunism • Hard to enforce agreements • Provides a small experiential knowledge in foreign markets • High monitoring costs • High potential for opportunism • Could damage the firm’s reputation and image • Does not provide experiential knowledge in foreign markets

Licensing

• Speedy entry to foreign market

• Does not require a high resource commitment in the targeted country

• Can be used as a step towards a more committed mode of entry

• Low-cost strategy to expand sales in order to achieve economies of scale

International franchising

• Speedy entry to foreign market

• Requires a moderate resource commitment in the targeted country

• Moderate-cost strategy to expand sales in order to achieve economies of scale

Wholly-owned ventures Greenfield strategy • Potential difficulty in accessing existing managers and employees familiar with local market conditions • Adds extra capacity to the existing market • The firm is seen as a foreign firm by local stakeholders

• Low risks of technology appropriation

• Could not rely on pre-existing relationships with customers, suppliers, and government officials

• Able to control operations abroad

• Provides high experiential knowledge in foreign markets

• Low level of conflict between the subsidiary and the parent firm

• Does not have the problem of integrating different cultures, structures, procedures, and technologies

• Managers of foreign subsidiaries have a strong attachment to the parent firm • Problem of integrating foreign subsidiaries into the parent’s system • Managers of acquired foreign subsidiaries may have a weak attachment to the parent firm

Mergers and acquisitions

• Low risks of technology appropriation

• Able to control operations abroad

• Provides high experiential knowledge in foreign markets

• Could rely on pre-existing relationships with customers, suppliers, and government officials

• Access to existing managers and employees familiar with local market conditions

• Does not add extra capacity to the market

167

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• Quality risks. These risks are associated with the possibility that some licensees might not be able or willing to maintain the quality of the product or service and hence compromise the reputation of the licensor. • Production risks. These risks are related to the possibility that licensees will not ‘produce in a timely manner, or will not produce the volume needed, or will overproduce’ . • Payment risks. There are risks associated with licensees not being able to or decide not to pay for royalties. • Contract enforcement risk. This risk is associated with licensors not being able to enforce the agreed contract. This usually occurs in emerging economies where there is weak infrastructure for commercial law enforcement. • Marketing control risk. This risk is related to the possibility that some licensees may not market the licensed product or process properly—under-spending on marketing activities, using inappropriate channels of distribution, and so forth.

5.5.3

International franchising

Franchising has been increasingly utilized as a method of business expansion over the last thirty years (Eroglu 1992). Several multinational firms, such as the Body Shop, Benetton Group, and McDonald’s, have developed a successful international franchising network. For example, 7-Eleven, a US company founded in Dallas, Texas, in 1927, has used international franchising to enter foreign markets for about forty years. At the beginning of 2009, the company had 35,200 7-Eleven stores in seventeen countries, most of which were franchises. An application for a new franchise can be simply made through the 7-Eleven website. International franchising is ‘a contract-based organizational structure for entering new markets’ (Teegen 2000: 498). It involves ‘a franchisor firm that undertakes to transfer a business concept that it has developed, with corresponding operational guidelines, to non-domestic parties for a fee’ Teegen notes that: . once the potential franchisor has established a reputation for its business concept, this develops demand as a ‘leasable’ commodity. The franchisor packages the business concept, operational guidelines and access to its trade and brand marks, and offers this business format to firms, who purchase the rights to exploit commercially the concept and trade names for a given period of time (typically between five and fifteen years) in a given geographical territory. Typical franchise contracts require an up-front payment to the franchisor as well as royalty payments based upon sales in the stipulated territory. Franchisers are responsible for improving the product/service mix, policing outlet quality, and promoting the brand in the host country. The franchise network system implies mutual cooperation and commitment between often distinct and, at least to some degree, autonomous firms. This cooperation is based, not only upon mutual advantages, but also on reciprocity. Thus, successful cooperation between

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franchisers and franchisees requires a high level of trust to alleviate the fear of opportunistic behaviour and to enhance the performance of the franchise. Multinational firms are increasingly relying on master franchisers to manage their franchise network in a particular country. Generally, master franchisers are from the host country. They are given the rights to develop and manage the franchise network in a particular country or region. Their duties include selecting suitable local franchisees, providing them with the necessary assistance, and collecting the franchise fee.

Risks of international franchising
While using a master franchiser with knowledge of local markets and cultural awareness has several advantages, it involves several risks (see Exhibit 5.4). These are: • The master franchiser may not follow the directives of the franchisor. • Franchisers may not understand the fundamental concept of the franchisor and as a result may communicate the wrong concept to the franchisees. • The fact that franchisers are responsible for improving the quality of the product, policing outlet quality, and promoting the brand may increase the potential for franchisees to free ride, in the belief that the franchiser’s efforts are sufficient for the franchise to succeed. This can result in franchisees attempting to increase profits by reducing the quality of inputs (e.g., by under-staffing). • A franchise may damage the franchiser’s image and reputation in the host country, because customers often cannot distinguish between franchised and company-owned outlets: a poor experience in one franchise outlet may hurt the reputation of the entire chain. Because of these risks, several multinational firms do not use a franchise system. For example, Starbucks Coffee Company uses only three business structures in international markets: joint ventures, licences, and company-owned operations.

5.5.4

Wholly-owned ventures

In contrast to exporting, licensing, and franchising, wholly-owned subsidiaries involve a higher degree of risk. Multinational firms have two options: greenfield investment in a completely new facility, or acquisition of or merger with an already established local firm.

The greenfield strategy
A greenfield strategy entails building an entirely new subsidiary in a foreign country from scratch to enable foreign sales and/or production. Typically, a greenfield investment signifies that the parent firm has decided to clone its strategy and structure in the foreign plant by transferring its technology, supply chain, organizational structure, and corporate culture (Hennart and Park 1993). For instance, during

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the 1980s and 1990s, Japanese firms adopting a global strategy structure preferred to clone their home country structure and strategy in foreign markets through greenfield strategies (Harzing 2002). Generally, greenfield investments are preferred when specific technical and organizational skills define a firm’s ability to compete. For example, Japanese multinationals with weak competitive advantage tend to use mergers and acquisitions (M&As), while those with strong advantages prefer greenfield investments to transfer their advantages to foreign markets (Hennart and Park 1993). Risks of the greenfield strategy The greenfield strategy is a high-risk strategy. In addition to the above risks associated with other modes of entry, such as political instability in the host country, other risks specific to the greenfield strategy (see Exhibit 5.4) include: • The risk of not being able to build relationships with customers, suppliers, and government officials in the new country. • The risk of not being able to recruit managers and employees familiar with local market conditions. • The risk of being seen as a foreign firm by local stakeholders.

The mergers and acquisitions (M&As) strategy
An international merger is a transaction that combines two companies from different countries to establish a new legal entity. International acquisition refers to the acquisition of a local firm’s assets by a foreign company. In an acquisition, both local and foreign firms may continue to exist. Barkema and Vermeulen (1998: 405) noted that, ‘for companies to prefer acquisition to greenfield entry, the cost of constructing new facilities, installing equipment, and hiring and training new labour force must exceed the costs of purchasing and recasting existing properties’ . In the short-term, cross-border M&As can have positive benefits for the shareholders of the acquired firm. In the longer term, however, profitability gains through are often limited or nonexistent (King et al. 2004). There are three types of M&A: • Horizontal M&As involve two competing firms in the same industry. This type of M&As is more common in industries where consolidation is required, such as automobile, petroleum, and pharmaceutical industries. • Vertical M&As involve a merger between firms in the supply chain. This involves, for example, a distributor or a supplier merging with a manufacturer. • Conglomerate M&As involve a merger of two companies from two unrelated industries. Conglomerate M&As were very popular in the late 1980s, but have been declining ever since as firms retreated to their core business during the 1990s and 2000s. The motives for M&As can be classified into three types (Hopkins 1999: 212): • Strategic motives aim to improve the overall strategic position of the multinational firm. This includes the intention to create synergy, to strengthen market power, and to gain

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speedy access to foreign markets (Hopkins 1999: 212). Synergy is the potential ability of two firms to be more successful as a result of a merger or an acquisition. If synergy is achieved, the combined firm’s value after the merger or acquisition should be higher than the combined value of the two firms operating independently. • Economic motives can include the desire to achieve economy of scale by joining productive forces, cost reduction by eliminating redundant resources after the M&As and entry of firms from slow-growing economies into high-growth economies (Gonzalez et al. 1998). • Personal motives can sometimes guide business decision-makers even if there are no significant economic gains from an international M&A for the firm. A top management team or a chief executive of a multinational firm may simply seek an M&A to satisfy their hubris and ego through ‘empire-building’ or for motives of self-interest such as increasing , their reward package and job security. Risks of the M&A strategy The major risks associated with the M&A strategy (see Exhibit 5.4) include: • The different corporate and national cultures, structures, technology, and procedures may cause great problems for integrating the acquired subsidiary into the parent company’s system. This may result in inferior performance and, in some cases, the subsequent failure of the acquired subsidiaries. • Managers of the acquired foreign subsidiary may not accept the parent company, which results in a weaker degree of attachment between the managers of the acquired foreign subsidiary and the parent firm.

5.6

Entry modes and risk v. control

Each of the five entry modes has its advantages and drawbacks. Therefore, multinational firms have to make trade-offs when they decide on the most suitable entry mode strategy. Control—the desire to influence decisions, systems, and operations in the foreign affiliate— and risk are the two most important factors in the decision formula when deciding on the type of entry mode (see Exhibit 5.5). The two factors often go hand in hand. To obtain control, the multinational firm must commit resources to, and take responsibility for, the management of its foreign plants. In other words, more control requires high risk and vice versa (Anderson and Gatignon 1986). When selecting the appropriate entry mode, multinational firms have to answer two questions: what level of resource commitment are they willing to make? And, what level of control over the operation do they desire? The firm has to look at the risks in the general environment, risks in industry, and firm-specific risks. For markets where total perceived risk is low, firms use entry strategies that involve a high level of resource commitment,

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Exhibit 5.5 Modes of entry and control versus risk
High Exporting Licensing Franchising PERCEIVED RISK

International joint venture Whollyowned

Low CONTROL

High

such as wholly-owned and joint-venture strategies (Brouthers 1995). In markets where the perception of risk is too high, however, the management might no longer believe that it has control over the risk. In this case, the management must abandon its desire to control and adopt a low resource commitment strategy by sharing risk with other firms through a joint venture or franchise, or pass the risk management to another firm—to a licensing or a franchise partner—which might be better qualified to manage the risks (see Exhibit 5.5). Recent research suggests that many different factors affect a firm’s choice of entry mode. A multinational firm may, for instance, be more willing to take greater risks and expand internationally via foreign investments if: it has considerable previous experience of international operations (Dikova and Van Witteloostuijn 2007); has market seeking motives (Paul and Wooster 2008); has significant competitive advantages vis-à-vis its competitors (Brown et al. 2003); or if it adopts a global—rather than international—strategy (Cui and Jiang 2009).

KEY CONCEPT
Multinational firms have to make trade-offs when they decide on the most suitable entry mode strategy. More control involves high risk and vice versa. When perceived risk is low, the multinational firm should use entry strategies that involve a high level of resource commitment, such as wholly-owned and joint-venture strategies. In contrast, when the perceived risk is high, the multinational firm should adopt a low resource commitment strategy by sharing risk with other firms through a joint venture or franchise, or pass the risk management on to a local firm through a licensing or a franchising agreement.

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5.7

De-internationalization

Internationalization is a two-way street. Multinational firms do not only enter new markets. They may have to reduce their international activities by pulling out of a country or a region, or by putting an end to their international aspirations when necessary. We refer to this phenomenon as ‘de-internationalization’ or ‘international divestment’ De-internationalization refers to ‘any . voluntary or forced actions that reduce a company’s engagement in or exposure to current cross-border activities’ (Benito and Welch 1997: 8). It includes total or partial withdrawal of a firm from an operational presence in a foreign country or region. Exit may result from corporate failure, organizational restructuring, or a successful sale of the firm, among others. Exit may be accomplished through sale of assets, international store swaps, bankruptcy, or related events (Burt et al. 2002; Alexander et al. 2005; Cairns et al. 2008). The decision to de-internationalize can be the result of two different processes: company failure (a forced process) or strategic decision-making (a voluntary process). A multinational firm may sometimes be forced to de-internationalize, either because the firm underperformed as a whole, or because a firm’s subsidiary in a specific country underperformed. For instance, Marks & Spencer was forced to withdraw from most European countries in 2001 because of the firm’s underperformance. Alternatively, a multinational firm may take a voluntary decision to de-internationalize for strategic reasons, for example, in order to improve efficiency through concentration on fewer subsidiaries or in order to make investments in other more profitable ventures. For instance, Tesco made a strategic decision in 1997 to withdraw from France, the home market of Carrefour; in 2005, Tesco withdrew from Taiwan in an asset swap deal with Carrefour in return for Carrefour’s stores in the Czech Republic and Slovakia. Tesco’s de-internationalization in 1997 and 2005 was part of the company’s overall strategy to concentrate the firm’s resources on countries where Tesco could obtain a dominant market position. Similarly, Carrefour withdrew from Russia in 2009 because the company could not obtain a dominant market position in the country. The de-internationalization process can be more complicated than the internationalization entry process. While countries tend to welcome multinational firms, governments and interest groups do not feel the same way when foreign companies decide to leave. For instance, the withdrawal of Marks & Spencer from France in 2001 led to strikes by the firm’s French employees, a court case against the company by French trade unions, and criticism by the French government. Multinational firms must develop and execute a de-internationalization strategy very carefully. Choosing the wrong de-internationalization strategy, or implementing the correct strategy poorly, can increase the cost of exit. The withdrawal of Marks & Spencer from France illustrates how a bad handling of the de-internationalization process could be very costly (Burt et al. 2002).
KEY CONCEPT
De-internationalization can be defined as any voluntary or forced actions that reduce a company’s engagement in or exposure to current cross-border activities. De-internationalization can involve total or partial withdrawal of a firm from an operational presence in a foreign country or region.

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5.8

Summary

Different types of internationalization stimuli can lead firms to consider the possibility of operating outside their home market: organizational factors arising from within the firm, and environmental factors that are outside the organization’s control. In addition, firms may have four different motives for establishing an investment in a foreign location: (1) natural resource seeking motive; (2) market seeking motive; (3) efficiency seeking motive; and (4) strategic asset seeking motive. These different factors combined lead a firm to a decision to internationalize its business activities. In addition to the initial decision and the motives to internationalize, one needs to understand the different modes of entry into a foreign country or a region. When firms decide to enter a foreign market, they are faced with a large array of choices of entry mode, ranging from export to wholly-owned operations. There is no best way to enter a foreign market and the mode of entry may differ from one country or region to another, as the opening case on Carrefour demonstrates. Multinational firms have to make trade-offs when they decide on the most suitable entry mode strategy. Control—the desire to influence decisions, systems and operations in the foreign affiliate—and risk are the two most important factors in the decision formula when deciding on the type of entry mode. The Uppsala Model seeks to explain the internationalization process by suggesting that a firm’s internationalization proceeds through stages of decreasing psychic distance. Its main argument is that firms generally proceed along the internationalization path in the form of logical steps, based on their gradual acquisition and use of information gathered from foreign markets and operations, which determine successively greater levels of commitment to more international business activities. They start with no regular export activities, then move to export activities via independent representatives or agents; after that, they tend to establish an overseas subsidiary; and, finally, they commit themselves to overseas production and manufacturing units. Multinational firms do not only enter new markets. They sometimes withdraw from a foreign country or region, or de-internationalize, as a result of company failure (a forced process) or strategic decision-making (a voluntary process). The de-internationalization process can be more complicated than the internationlization process.

 Key readings
● J. P. Buckley and P. N. Ghauri (1999), The Internationalization of the Firm: A Reader (London: Thompson Business Press) is a collection of some of the key articles on internationalization. ● On the Uppsala Model, see Johanson and Vahlne (2009). ● On entry modes and risk and control, see Brouthers (1995); and K. Brouthers and L. E. Brouthers (2001), ‘Explaining the National Cultural Distance Paradox’, Journal of International Business Studies 32(1): 177–89.

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Discussion questions
1. Select a multinational firm and identify and discuss the internationalization stimuli. Was the firm pushed or was it pulled? 2. To what extent do multinational firms follow the Uppsala Model? Justify your answer with examples. 3. Identify a Born Global firm and discuss its internationalization process. 4. ‘There is no one best way to enter foreign markets. It is a case of horses for courses.’ Discuss this statement. 5. Why is the de-internationalization process sometimes more complex than the internationalization process?

Closing case study Internationalization of a Chinese firm—the Haier Group
The Haier Group began as a nearly bankrupt refrigerator company called Qingdao General Refrigerator in Qingdao, China. In 1984, Zhang Ruimin was appointed as plant director and he has remained the company’s CEO until today. In 1992, the company was renamed the Haier Group. Under the leadership of Zhang Ruimin, the Haier Group rose to become the third largest home appliance manufacturer in the world, with 240 subsidiary companies and over 50,000 employees around the world. In the period 1995–2005, the company’s global revenue increased from RMB4.3 billion to RMB103.4 billion (see Exhibit B). In 2008, the Haier Group was ranked as No. 13 on Forbes’ Reputation Institute Global 200 list. The company also ranked as No. 1 among Chinese enterprises on the Financial Times 2008 list of the most respected global companies. Zhang Ruimin had an international outlook from the start. Already in 1984, soon after becoming the company’s director, he introduced technology and equipment from the German company, Liebherr, to produce refrigerators in China. In 1990, the company started exporting its products to Europe as a contract manufacturer for multinational brands such as Liebherr’s ‘Blue Line’ brand. Zhang Ruimin said: ‘We started exporting to developed markets first because if your products are good enough for consumers in Europe and in the US, you will have better products in developing markets.’ Zhang Ruimin’s ambition was to create China’s first multinational firm. The company’s exports to the United States started in 1994. Michael Jemal, a partner in the import company, Welbilt Appliances, contacted Haier in order to buy 150,000 refrigerators for the US market. All the refrigerators sold within a year, helping Haier to capture 10% of the US market for small compact refrigerators. Following on from this success, the company collaborated with Jemal to market a wider range of products in the US market. In the 1990s, the company acquired many other Chinese companies. The product range expanded beyond refrigerators to include other home appliances such as washing machines, televisions,

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air-conditioners, and telecommunications equipment. The company improved its products by acquiring foreign technology through joint ventures with companies such as Mitsubishi of Japan and Merloni of Italy. Zhang Ruimin said: ‘First we observe and digest. Then we imitate. In the end, we understand it well enough to design it independently.’ By 1998, the Haier Group had a market share of over 30% in refrigerators, washing machines, and air-conditioners in the Chinese market. But the Chinese home appliances market was saturated and there were few opportunities for further domestic expansion. The Chinese government encouraged the company to expand internationally. Furthermore, the company faced greater domestic competition, as foreign companies began to expand aggressively in the Chinese market. In the mid 1990s, a fierce price war broke out among home appliance manufacturers in China. The Haier Group’s CEO, Zhang Ruimin, saw an urgent need for international expansion in 1996: ‘Only by entering the international market can we know what our competition is doing, can we raise our competitive edge. Otherwise, we will lose the Chinese market to foreigners.’ Therefore, the Haier Group began setting up operations overseas. Zhang Ruimin pursued a different internationalization strategy to other Chinese companies, which were satisfied with exporting low-cost products from China as contract manufacturers for foreign firms’ multinational brands. In contrast to other Chinese companies, the Haier Group emulated the strategies of successful Japanese and Korean firms such as Sony, Samsung, and LG in terms of taking its own brand to foreign markets and in terms of establishing production in foreign markets. Zhang Ruimin believed that, by setting up manufacturing plants overseas, the Haier Group could gain advantages from avoiding import tariffs and reducing transport costs. He also believed that the company’s products would appeal more to consumers in developed countries, if the products were no longer regarded as Chinese imports. ‘All success relies on one thing in overseas markets – creating a localized brand name. We have to make Americans feel that Haier is a localized U.S. brand instead of an imported Chinese brand,’ said Zhang Ruimin.

Exhibit B Revenue of the Haier Group
120 100 80 60 40 20 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Revenue (RMB billions)

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The Haier Group started its international expansion in developing countries. In 1996, the company established a manufacturing plant for refrigerators and air-conditioners in Indonesia. In 1997, further expansions took place in the Philippines, Malaysia, Iran, and Yugoslavia. Once the company gained some international experience, it decided to expand to developed countries. In 1999, the Haier Group expanded to the United States: a refrigerator plant was established in South Carolina and a design centre was established in Los Angeles, California. The company’s investment of US$30 million was the largest foreign investment by a Chinese company in the United States. In 2001, the Haier Group purchased a refrigerator plant in Italy and the company opened research and development (R&D) centres in Germany, Denmark, and the Netherlands. In 2006, the company expanded to Japan (see Exhibit C). Initially, the Haier Group expanded internationally through joint ventures with local firms in Indonesia, Yugoslavia, and other countries. Within three years, the company decided to expand through wholly-owned investments (see Exhibit C). But the company’s executives are flexible when taking decisions on international market entry. The entry into the Japanese market through

Exhibit C Milestone foreign direct investments by the Haier Group
Country Indonesia Philippines Malaysia Iran Yugoslavia India United States Bangladesh Pakistan Italy Germany Denmark Netherlands Jordan Japan Year of entry 1996 1997 1997 1997 1997 1999 1999 2001 2001 2001 2001 2001 2001 2005 2006 Mode of entry Joint venture Joint venture Joint venture Joint venture Joint venture Joint venture Wholly-owned Joint venture Wholly-owned Wholly-owned Wholly-owned Wholly-owned Wholly-owned Wholly-owned Joint venture

Source: D. Yuping (2003), ‘Haier’s survival strategy to compete with world giants’, Journal of Chinese Economics & Business Studies 1(2): 259–66; Yang et al. (2009); G. Duysters, J. Jacob, C. Lemmens, and Y. Jintian (2009), ‘Internationalization and technological catching up of emerging multinationals: a comparative case study of China’s Haier Group’, Industrial and Corporate Change 18(2): 325–49; K. Palepu, T. Khanna, and I. Vargas (2006), ‘Haier: taking a Chinese company global’, Harvard Business School Case No. 9–706–401; and Haier Group website at http://www.haier.com/.

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a wholly-owned investment would be difficult, so the company set up a joint venture with the Japanese company Sanyo in October 2006 as a means for entering the Japanese market. The Haier Group used its international expansion, not only to sell products overseas, but also to learn new knowledge and skills in foreign markets. The company established research and design centres in the United States, Canada, Japan, and France, among others. It also engaged in strategic alliances with companies such as Mitsubishi, Philips, and Sanyo. Zhang Ruimin had the ambition to create a truly innovative global company that competes on the basis of new product innovations, not on the basis of low costs. As a result of the Haier Group’s international success, the company now faces global competitors. When the Haier Group expanded to the United States, it focused on niche markets such as small, compact refrigerators for students and offices, in order to avoid direct competition with companies such as Whirlpool and GE. But foreign competitors have now formulated strategies to counteract the Haier Group’s international expansion. Whirlpool and Electrolux have invested tens of millions of dollars to establish a manufacturing and distribution base in China. These competitors hope that aggressive competitive moves in the Chinese market will prevent the Haier Group from earning more profits that the company would otherwise use to expand further internationally. The Haier Group executives are ready to face the challenge of global competition. ‘We are number three in the world for white goods,’ said Yang Mianmian, the company’s group president. ’We want to be number one.’ Discussion questions 1. Why did the Haier Group expand internationally? 2. To what extent did the expansion of the Haier Group follow the Uppsala Model?

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