Internationalisation of Asian business

Singapore Management Review, 2000 by Sikorski, Douglas, Menkhoff, Thomas

Theory of Internationalisation

Expansion of a firm overseas is more significant than growth within the domestic setting only, involving more complications in management, organisation and control than just the dynamics of growth. Mere sales become exports; investment becomes "foreign direct investment" (FDI); contractual arrangements among enterprises become international joint ventures, licensing or other sophisticated foreign market entry strategies. The international dimension adds a considerably cosmopolitan aspect to any business endeavour.

Internationalisation includes the following general modes of market entry: exports, turnkey projects, licensing, franchising, joint ventures and wholly-owned subsidiaries. (Strategic alliances are cooperative agreements - typically licensing and joint ventures - between potential or actual competitors.)

Internationalisation Patterns

There is a large and distinguished body of literature1 that explains the process of internationalisation in terms of some logical sequence of these activities, often starting with simple exports and gradually progressing with increasing experience and commitment to FDI and/or strategic alliances. This orderly approach to explaining international business has been controversial because of its programmatic- nature, restricting the theory of internationalisation to a unilinear concept. There are too many exceptions to such a simple strategy. Nevertheless, proponents argue that much international business, especially in new multinationals, typically follows a progressive sequence, and it behooves theorists to understand the logic of the sequential development of internationalisation.

Perhaps the most famous of these programmatic models was Raymond Vernon's International Product Life Cycle. This theory predicted that internationalisation would occur as a transfer of technology across borders at appropriate stages of maturity of the product, that is, a step-by-step evolution of new market demand and suitable production sites overseas. In this theory, internationalisation follows a systematic, predictable sequence, starting with exports by the innovator of a new product, then following these exports by overseas production in the new markets - in first advanced and later developing countries, ending with exports from least-cost production sites back to the original innovating country. The Product Life Cycle idea of internationalisation is appealing in its logic but becomes too inflexible to accommodate the complexity of modem international business. First-time investors may be more incremental in their approach; but larger, more diversified multinationals use a global strategy. For example, experienced multinationals jump stages, perhaps investing immediately in least-cost countries to produce a new product innovation and export back to the home country and worldwide, while slower competitors are still in the early stages of the indicated product life cycle strategy.

Much research has in fact uncovered regularised steps in internationalisation, for example, an early study (Johanson and WiedersheimPaul, 1975) found that firms typically progress from no exports, to exports through independent agents, to a sales subsidiary, to a production subsidiary (FDI).

Another incremental concept of internationalisation is that increasing knowledge and commitment over time implies that the process is cumulative and each new venture depends on the previous experience.

The fundamental concept of internationalisation is contained in the eclectic theory of foreign direct investment as propounded by John Dunning, for example. "Internalisation" implies a need for ownership for purposes of control of the international operation; locational advantages determine where operations are conducted; and consideration of the firm itself recognises differences in competitive capabilities. Internationalisation is thus explained in terms of these three considerations. Internalisation explains the need for FDI; location advantage is simply "comparative advantage" which is the fundamental basis for exports; and the third consideration stresses "core competence" of the international firm. One key competency of Asian firms might be their "networks".

International Networks

We now explore how internationalisation can be explained in terms of relationships and interdependencies, that is, networks2. Firms may go international to follow other firms in their national network. The degree of internationalisation is a function of the firm's position in other national networks and the relative importance of these foreign networks to the firm. By this line of reasoning, the underlying motive for internationalisation is to achieve international integration.

Thus, to a greater or lesser extent, networks can take on outside, or international, constituents. If firms go international leaving important members of their network behind, there must be either a capability of building new networks or some degree of self-sufficiency. Any of these solutions imply special international competence.