The On International Expansion

The following sample essay on International expansion. Regardless of the many reasons that companies might have for international expansion9, once their target countries, regions and/or niche markets have been identified, managers face another critical decision: selecting the most appropriate method of foreign market entry which would further the companies’ objectives and strategies. Because making the right choice is never simple and is often influenced by a variety of complexly interrelated factors, the topic of strategies for international expansion has been in the centre of theoretical discussions for a number of years.

Models that aim to describe how foreign market strategies are determined originate from the field of international business but have consequently been explored by marketing experts as a part of international marketing. Root10, for example, claims that the choice of market entry strategy is of critical importance to multinational enterprises (MNEs) since it affects their performance in the global market, impacts directly on their long-term competitiveness and determines to a large extent how successful their financial performance is going to be11.

Other writers12 view decisions regarding this aspect of the marketing strategy as being of critical importance since the commitments made are likely to affect businesses not only in the short but also the long term. Douglas and Craig13 state that the method of foreign market entry “signals the firm’s intent to key competitors and determines the basis for future battles”. Due to the importance of choosing the right market, over the years a number of models have been developed which have aimed to explain why certain modes are preferred to others.

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International marketing theory contains five most popular paradigms which have been researched and applied widely. These theories together with their advantages and drawbacks are summarised briefly below: > The stage of development (SD) model was developed by Johanson and Paul in 1986 while studying the internationalisation strategies of small and medium sized enterprises (SMEs). As suggested by the name, it assumed that entry modes chosen by firms were dependent on the stages of their development.

The model viewed international expansion as an evolutionary process which was determined by the domestic location of the firm, and by the level of commitment it was prepared to make abroad. As such the SD model for the first time identified the correlation between the size of the enterprise, it resource capabilities and its risk tolerance in a foreign environment with the chosen mode of entry. Unfortunately, due to the fact that it failed to explain why some SMEs preferred to enter markets for the first time through foreign direct investment (FDI) rather than export it was never widely used in practice14. > The transaction cost analysis model (TCA)15, originally created by Anderson and Gatignon and its consequent extensions, aimed to explain market entry modes as derivative of organisational structure. It suggested that multinational enterprises chose a specific mode of market entry in order to minimise the so called risk-adjusted efficiency.

The latter determined choice as the best solution of the required level of control and the optimisation of the following types of: costs translation specific assets, external uncertainty, internal uncertainty and free riding potential. The TCA model extended the SD model in the fact that it identified the connection between cost (i. e investment) and control. In spite of this more innovative approach, however, it also had some clear weaknesses. First of all, it had limited application in practice since its core, the “transaction costs” were difficult to quantify and therefore to measure.

Based on this the model could not be applied to the real world for business decisions. In addition, it had a limited explanation ability where complex choices of market entry were taken16. It neglected the influences of government and production cost on market entry17; failed to take into consideration the macro and micro environment circumstances in which companies operate18; assumed that the only reason for international expansion was the optimisation of profit19 and excluded any non-transaction benefits20.

Lastly, while some of the more recent modifications of the model have tried to address these deficiencies, they are in reality still based on transaction cost which remains difficult to quantify prior to the relevant transactions. Finally, the decision making process model24 argued that entry mode choice should be treated as a multistage decision making process during which various factors are taken into consideration. Among there were the objectives of the firm, the existing macro and industry environments, and the associated risks and benefits.

The major drawback of this model was that it concentrated on optimising the process but did not take into account which factors might affect it and what their impact on the entry choice might be. In addition it ignored the roles of the organisation and the decision maker in this process. Research indicates that no other significant theories regarding foreign market entry have been developed since 1998. Rather, many academics have concentrated on examining the impact of certain aspects affecting the entry mode decision. Factors other than the above mentioned have been examined to include: technology transfer, immigrant effect, market size, firm size, CEO successor characteristics, cultural distance, industry barriers and firm advantages, international experience, country risk and environmental uncertainty, role of staffing; foreign exchange and host country currency25.

All of these can be organised into country specific factors (cultural distance, institution, exchange rate, etc. ), industry specific factors (market size, market structure, industry type, etc.), firm specific factors (firm capacity, firm size, etc. ) and product specific factors (product type, maturity, sales services, etc. ) The latter classification approximates closely a model that can be found in the recent works of Jobber26, according to whom there are two broad areas of consideration for companies that wish to internationalise. These are, on one hand, the macro-environmental issues or otherwise stated the ones originating from the external to the business environment, and micro-environmental issues which relate primarily to the capabilities of the firm.

He divides the latter into two categories depending on whether they relate to the industry as a whole or to the company in specific (see fig. 2 below). The author of this research believes that this theoretical model due to its simplicity is far more applicable for businesses and since it includes many of the factors contained in the classical theory, it should be used as the foundation for this work. In his opinion, Jobber’s representation provides a very good structured approach to the analysis of the variety of factors that can potentially impact on a company’s strategic marketing decision of this type.

It also follows closely the strategic business method for evaluating opportunities (i. e is true to process) while taking into account many of the above mentioned factors. The problem with describing the choice of a market entry decision, however, remains “ill-defined, complex and dynamic”27. It is a function of a number of factors and the ways and strength of their interaction, and not all of them have the same importance in varied situations. Individuals studying the same environment from different angles and with different expectations may arrive at different conclusions.

Different examples selected, different time periods analysed, different methodologies used, or even different used in the analysis can lead to even conflicting results28. In the process of identifying the available alternatives, most academics agree that the classification of these is best presented on the basis of the degree of involvement into the target market. Possibly the most comprehensive and complete list of available strategies can be found in Doole and Lowe29 (see fig 3 below).