How Do Companies Go International?
The process of internationalization of a company is a learning way that has several dimensions, such as economic, psychological, sociocultural, and institutional aspects. It is a gradual process made up of a set of cumulative decisions and actions. This process requires a long time, which allows the organization to go through a series of increasingly complex phases. However, there are so many companies that, even having the ability to internationalize, decide not to do so.
Expanding the organization’s geographic competitive landscape means operating in a new and, sometimes, unfamiliar environment. Consequently, uncertainty is a factor that affects all the company’s actions at the international level.
As the company advances in its internationalization process, the committed resources increase. This growing commitment of resources is also highly irreversible, forcing the organization to become increasingly involved in the process. This incremental commitment to outside activities is simultaneously a cause and a consequence of the deepening of the chosen path.
As a consequence of this growing need for commitment in an environment of uncertainty, the organization will tend to operate slowly, seeking to take control of an increasing proportion of activities, to reduce its risk. There is a relationship between both variables so that a greater commitment of resources corresponds to a greater need to control the process.
This greater control implies the internal development of a greater number of activities in the organization’s international value chain. While in the first stages only a couple of them are transferred, generally the closest ones to foreign clients, then a greater number of activities are transferred.
Likewise, in the first steps, the company assigns some functions to external agents (licenses, importing companies, franchises, etc.). As the importance of international operations increases, the organization tends to internalize a greater number of activities. It is a process that implies the acceptance of higher levels of organizational complexity.
In order to lessen the uncertainty effect, the organization will tend to go first to the best-known national markets, that is, those on which it has a greater volume of information, both generic one (about the country) and specific one (about the market). The company will prefer to start with those closer countries, taking into account not only physical distance but also the psychological distance between the domestic market and the foreign one.
What are the stages of organizational internationalization?
Non-regular exporting activities: the company does not commit resources in its external activities, while there is no regular information channel between the company and those markets.
Exporting via independent reps: the company has a regular channel to obtain information on foreign markets, the commitment of resources being greater than in the previous case.
Establishment of sales subsidiaries abroad: this implies having a controlled information channel allowing the company to obtain its own experience from its foreign operations. The commitment continues to grow and with it the irreversibility of decisions.
External production units: international commitment now reaches its highest point, and with it, the possibility of gaining experience in carrying out activities in the corresponding nation.
What are the three most important decisions when a company goes international?
- Input Modes Selection (how)
Companies will prefer to start entering new countries through mechanisms that involve a reduced commitment of resources (investments, personnel, etc.).
In an escalating way, they will go through exports, turnkey projects, licenses, franchises, joint-ventures, and their own subsidiaries.
Companies will prefer to start entry in countries that involve lower levels of uncertainty, that is, in countries with a reduced distance from the country of origin.
- Markets Selection (where)
Psychological distance: “factors that inhibit or hinder information flows between companies and markets”.
- Business Lines Selection (what)
Companies begin by transferring their simplest tasks abroad, over which they have greater control and mastery (i.e., star products of the BCG Matrix). In summary, the basic objective is to minimize the degree of uncertainty/risk.
In recent years, a new behavior has been identified concerning the internationalization of some companies, which go to foreign markets without going through this gradual learning process. Of course, these companies follow a disruptive new internationalization model, the Born Globals.
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