Can International Business Theories Interpret Current Business Internationalization Processes?
When analysing the theoretical contributions in the matter of International Business and Management, it may be observed that these studies are often strongly influenced both by their historic period and by the geographic origin of the analysed companies; they are, then, hard to generalize outside of a specific setting in space and time.
Before the 1970s, internationalization was considered as a fundamental phase in the evolutionary process of American companies, one that, in sequential terms, was held to follow that of expansion on local markets (Vernon 1966; Chandler 1962). The following underlying determinants were identified:
- The weak systemic connection in the oligopolistic structure of the US market (Knickerbocker 1973), or the oligopolistic rivalry among companies (Vernon 1966; Flowers 1976; Graham 1978).
- The more contained labour costs abroad.
- The dollarâs continued appreciation against foreign currencies, typical of the 1960s; this contributed towards deteriorating the exchange rates and consequently encouraged United States companies to replace exportsâwhich were being countered by declining foreign demandâwith direct foreign investment.
- The limited nature of the available technological and productive skills, which led to choosing internationalization as an alternative to diversification on the domestic market. This was in order to better exploit the knowledge and skills that were possessed, by applying them to similar activities abroad instead of seeking to conquer new spaces through diversification into activities unknown on the domestic market.
Chandlerâs analyses show the sequential stages of development of large United States multinationals: in the initial start-up and development phases, organizations began to concentrate monetary and knowledge resources in the âcoreâ business and within the confines of the domestic market; only after achieving a sustainable, long-lasting edge in the undertaken businesses did the companies proceedâin successive stages and with a view to international expansionâwith correlated diversification strategies and, lastly, with conglomerated diversification strategies.
Moreover, internationalization was considered a mandatory path; its raison dâĂȘtre lay in the managerial imperative of a growth often obligatory when the produced goods were in a phase of maturity/saturation of the domestic market. Internationalization could also be pursued to cope with a situation of high risk levels connected with the companyâs âweakâ position on the customersâ familiar market (excessively concentrated market), or with the suppliersâ strong contractual power.
Therefore, internationalization for diversification was seen as the final phase in a growth process on a corporate level, induced by the need to invest surplus resources in value-generating activities.
Aimed at expanding business activities into new sectors or businesses, this âportfolio perspectiveâ had its start in the need to reinvest the surpluses generated by cash cow activities in âstarsâ or âquestion/problemâ activities. From this standpoint, emphasis was placed on the objective of optimizing the corporate portfolio of strategic business areas that, as is known, required investment in new areas of the surplus liquidity created by mature businesses (self-produced financing), for which the company enjoyed a high relative market position. Implicit in these statements is the coverage of the financial risk that is higher when going into new businesses, and that may, for many authors, be accessible only to firms that record levels of available capital for new investments.
Therefore, the determinants of internationalization took concrete shape mainly in an optimization of the portfolio of the companyâs activities, and therefore in advantages exclusively financial in nature. The strategy generally aimed at investing excess liquidity in the needs required by current investments, or targeted obtaining, from new investments, rates of yield higher than those already achieved in the company.
By abandoning the âdogsââactivities discontinued by local operators because they were considered no longer profitableââsupply voidsâ were often generated,1 which were exploited by foreign companies to gain entry into new markets. These are the determinants that led Japanese companies to penetrate the American market while also confirming the success of Japanâs incremental strategy. Entering into âsupply voidsâ in fact allowed Japanese firms to open a âwindowâ onto the US market, and to use it as a âspringboardâ for placing other home-country products abroad. In fact, this type of entry helped lay the foundations for assimilating knowledge of the US market, and for Japanese enterprises to take on the character of âinternal operator.â
Referring once again to the evolved development models, International Business literature has its origins in economic models, which explained the evolution of international trade and of foreign direct investment (FDI ), and in organizational theories, which interpreted the growth of US multinationals during the 1960s. This current of study also includes the theoretical contributions developed after the Second World War with the intensified flows of FDI by Western and above all American multinationals.
Emerging in the first place are the contributions that interpret internationalization as a process by phases, presenting a growing level of companiesâ foreign involvement (Vernon 1966).
According to Vernon , the company, by developing innovative technologies during the introduction phase, begins its process of expanding on the domestic market as a âfirst comer.â Only after having acquired a dominant position on the market, and when joined by a âsecond comerâ within domestic boundaries, does the company, following a market-seeking logic, begin to export its output to target countries with a demand gap. At least from the theoretical standpoint, exporting makes sense so long as the sum of the transport costs plus the marginal production costs are less than the average production cost in the markets being exported to.
The determinant underlying a process by phases is the reduction of entropy risk, and companiesâ choices to enter new markets are seen as the result of the technology gap between the domestic market and the foreign country, or as the attempt to copeâagain by exploiting technology gapâwith the risks connected to the maturity phase of the âproduct life cycle.â
In the maturity/decline phases, technology is entirely mature, standardized, and perfectly accessible to local imitators, so the costs take on primary importance for the company, as it is also forced to cope with the imitative processes developed by local producers in host countries; looking to economize, the company is more apt to delocalize production (by means of FDI ) to developing countries with lower labour costs.
The Vernon model was long the most well-known and generally accepted model for interpreting FDI , and in fact it made a considerable contribution towards understanding American companiesâ international growth processes. However, over time, the Vernon modelâs explanatory power gradually declined, as it was incapable of interpreting increased FDI oriented towards destinations not always characterized by lower levels of development, or of explaining the trend among companies to make this investment while the product life cycle was in its development phase (Calvelli 1998; Cannavale 2008), in order to prevent followers located in the outlet markets from quickly appropriating the technology (even if it is incorporated into production), or from producing the same goods at lower costs (Rapp 1973).
Moreover, focusing attention on the current trends in the process of companiesâ internationalization towards emerging countries highlights other interpretative limits of the Vernon model. In the first place, companies in the industrialized countries are rarely following a path of development by phases that starts with exporting and ends with FDI . Among other things, it is anachronistic to consider as modes of internationalization only those of the competitive type, while relegating to residual choices the collaborative-type modes that were more in use starting from the 1990s.
In the second place, the international development model of SMEs, the step-by-step âsta...