Small and medium enterprises internationalization process

SMEs Internationalization Process

INTERNATIONALIZATION MODELS

TRADITIONAL MARKETING APPROACH

Uppsala model (the classical model)

NETWORK THEORY

ENTRY MODES

EXPORT ENTRY MODES

Direct Exports

Indirect exports

INTERMEDIATE ENTRY MODES

LICENSING

Franchising

Joint venture

Hierarchical entry modes

INTERNATIONALIZATION MODELS:

Traditional Marketing Approach:

An American born British economist, Edith Elura Penrose has described the traditional marketing approach in his exceptional work "The Theory of the Growth of the Firm." The writer has described how the firm grows and how effectively and efficiently it can grow at a faster pace. Penrose had participated in a research which reviewed the growth of the firms. After the through research she found out that the theory which existed at that time related to the growth of the firms was not sufficient enough to clarify the growth of the firms. The growth of the firm which is in theory is different from the practical circumstances that the firms have to face. The growth of the firm is initiated with the connection of a particular group of human beings attempting to do something. The pace at which the firm grows has to face a lot of challenges especially from the administrative angles. The amount of human resources both internally and externally are hard to find. Therefore the process of expansion internationally is a dynamically constrained process.

The roles played by the managers and entrepreneurial team are critical to the growth of the firm. The main three roles of the managerial team are:

Interacting with the firm's resources

Creating new uses for the resources

Increasing the rate of firm's strategic growth

Firm's growth process is a highly dynamic process which deals with the management of resources efficiently. This does not deal with only the management of the resources it also involves interacting with them. The problem with this process is that although it encourages continuous growth of the firm but it can also limit the growth rate at which the firm is expanding. This process can be better understood by studying the resource management concept which was given by Maloney.

Resources are what really drive the strategy of the firm. Only when a firm has the sufficient resources then that firm can internationalize the business. The relationship between the various kinds of resources that the firm operates with and the ideas, experiences and strategies should be studied in order to manage the growth of the firm. The human and financial resources should be located effectively in order to find unique and new opportunities for a firm to grow. The managers would need to identify and create proper opportunities for the human resources in order to build a strong growth oriented culture. The managers need to be effective when it comes to allocating the financial and human resources.

The concept of transferability of the knowledge is relevant to the study of the growth of the firms. The experience level of managers is critical as it helps in increasing the productivity and the knowledge which contributes to the increase in the knowledge level of the organization which helps the growth and expansion of the firm. Experience can never be transmitted into someone, it takes time. Versatility of the resources is critical when making a decision to internationalize the business. Mangers usually make subjective decisions.

"Penrose Effect" is what limits the growth of the firm. It refers to the managerial capability which is the main binding constraint. If a firm decides to expand at a faster pace than the growth of the abilities of the resources then the expansion is bound to be ineffective. The absorption of the technology of the modern era can also act as a major binding constraint in the growth of the firm.

2. Uppsala model (the classical model)

Another model which deals with the internationalization process is the "Uppsala Model." This model focuses on how the knowledge and learning have an effect on the way a firm views the foreign market. This model is quite different from the traditional model. The traditional model was focused on how firms invest in foreign markets and how they carry out the expansion procedures. The main idea of the Uppsala model is to examine how the organizations gain knowledge about the investment behavior before the expansion processes.

The Uppsala model aims to explain how the firms step-by-step intensify their expansion in the foreign markets. Firms in the first place gain some experience through the domestic market then they decide to move their operations to the foreign markets for a greater profit margin and more opportunities. The expansion of the firm starts with the foreign operations taking place in the culturally and geographically near nations. Then slowly and gradually they expand into more distant countries. They expand initially by foreign operations by exporting in the traditional manners then they gradually use more intensive strategies to expand their businesses with the help of the application of highly skilled workforce and applying operation modes which are extremely demanding. The model has proposed that the initiation of the foreign sales is from the export orders on an occasional basis which then follows a trend of regular export orders. This is the process through which a firm gradually starts knowing the market and the requirements of that market.

The model assumes that the expansion to the international market is linked with the marketing strategy while other traditional models have taken the expansion initially for the sales of the product and operations without a specific marketing strategy. The firm does not commit a high level of resources into the foreign market in the initial stage. The firms increase the level of human and financial resources in the international market as it gradually acquires the market knowledge, experiential knowledge hence internationalization is an evolving process. The local market conditions and cultural differences limit the pace of the foreign expansion. The model has also proposed that the level of support given to the staff and the organizational commitment towards expansion might change during the course of the expansion depending upon the performance and the response in the foreign market. Commitment can be in terms of resources or the level of financial support that is required for the expansion to be managed efficiently. A large investment just in terms of saleable equipment might not mean that the organization is fully committed to the expansion as they might not be sending over their best of the staff members or the managers which will show their lack of commitment.

The Uppsala model has explained how the firms carry out their operations in the foreign markets. The main part of the model is how the firms stay back and learn the foreign market by making small investments initially which allows them to take less risks and gather market knowledge. At the right time and with the right knowledge successful firms enter the foreign markets with full commitment to the expansion and they carry out their operations in a localized manner. This helps them in connecting with their customers in a better manner and allows them to take managed risks.

3. Network Theory:

Network theory is another paradigm that deals with the internationalization of the firms. It is most commonly applied when firms are going for new ventures internationally. This theory focuses on the role and impact that the external resources have on the firm by making them dependent on the network players. Therefore network players should be treated as strategic partners and hence considered as strategic resources. Health relationships can only be developed when there is a direct contact with the network players. These direct contacts will enable a higher level of control over them and the resources which are acquired from them. Hence ownership will be transferred in an easier manner. Networks help in speeding up the internationalization process by providing better relationship in the value chain. The main reason for networking to be such an integral part of internationalization is this that the firm then does not have to acquire the external knowledge of the operation instead they can focus internally and come up with better solutions for the internationalization issues. A strong network also means that they have more ways to figure out the insights of the market. This gives rise to more hybrid strategies and a lack of export expertise required for carrying out operations in the foreign markets as the network players are reliable enough to make the correct decisions which would benefit the firm.

This theory is contradicting the traditional theories and the Uppsala model. This theory explains that firms can enter the international market rapidly and be successful. This contradicts with the Uppsala model which stated that prior knowledge and expertise are required to enter a foreign market and this knowledge can only come from experience which takes time. However this theory states that if the networking is strong then firms can enter into foreign markets rapidly without requiring any prior experience and knowledge as the knowledge is already possessed by their partner / suppliers / network players.

The network theory has different dimensions and behaves differently for various sectors. Technology industry will require different kind of network players and will have to focus more on innovation. In the technology industry the expansion might be concentrated because of the nature of these industries as they have more of independent operations and have different structural characteristics. It is hard to develop a strategic action for these types of industries. This means that the major expansion in this manner will come from most of the manufacturing firms and industries which are knowledge intensive which have high amount of investments in Research and Development departments.

Network theory also explains the challenges which are faced by immigrant entrepreneurs. As the immigrant entrepreneurs are entering the market with lack of local knowledge, limited recognition locally, language barriers and difficulties in obtaining the network players. All this makes their entry difficult. Therefore the immigrant entrepreneurs usually acquire the international network players to facilitate the growth of the venture. The network theory can only partially explain the influence of resources and ownership on exporting.

Entry Modes:

The firms' expansion strategy decides which mode to enter the foreign market with, the best alternative is selected and then the expansion takes place. The basic purpose of any business is to earn profits and to establish itself as a global player. This demands a highly complexed internationalization strategy and to identify the various opportunities which are available to them and then explore that through the resources and capabilities that the company possesses. A highly important decision for a firm is how to enter the market as there are a number of possible ways through which a company can decide to enter a foreign market.

The following chart can explain the expansion alternatives available to the companies:

ENTRY MODES

INVESTMENT

LICENSING

EXPORT

PORTFOLIO

FOREIGN DIRECT INVESTMENT

DIRECT

INDIRECT

CO

PERATIVE

JOINT VENTURES

FRANCHISING

CONTRACT MANUFACTURING

The chart explains the various modes of entering into a foreign market. The most common used methods for entering the foreign markets are given below:

Exporting

Licensing

Franchising

Joint Ventures

Direct Investment

Export Entry Modes:

The process which involves a seller who sells his goods and services which are produced in our country and then they are sold in the other country is called exporting. There are two types of exporting. Direct and Indirect. However some may argue that a third type also exists which is the cooperative exporting. Exporting can be carried out by acquiring the services of the following four players:

1. Exporter

2. Transporter

3. Government

4. Importer

Direct Exports:

Direct exports are the most commonly used type of exporting. This is done through capitalizing on the economies of scale. This provides the firm with affordable actions and a better control. The following are the types of direct exporting: