Term Paper on "Classic Internationalization Theories"

Term Paper 11 pages (5335 words) Sources: 11 Style: Harvard

[EXCERPT] . . . .

Classic Internationalisation Theories

Classic Internationalization Theories

Classic internationalisation theories are criticised for their validity in the internationalisation of the "born global" firms. Take an example of your interest to discuss your view.

This research paper shall examine the thesis statement 'Classic internationalisation theories are criticized for their validity in the internationalisation of the Born Global firms'. During the course of our investigation the paper will look at the geographical and financial issues involved with Born Global firms. It will then go on to talk about managerial concerns linking them with models and the Classic Internationalization Theories. The paper also examines Born Global firms such as Enron and GE scrutinize differing spectrums of the theory to answer our thesis question.

Introduction

Thirty years ago, the multinational was distinct from national organizations both in its geographical 'reach' and in the managerial complexity it confronted. Over time, the barriers to internationalization have fallen and the population of multinationals has mushroomed. Today there are few, if any, large commercial organizations that are entirely national in the scope of their operations - from supply chains to customers. Consequently, the distinction between multinational enterprise and 'big business' has effectively disappeared (Wetzel, 2005). And many new firms are 'born global', especially in digital markets. For the purposes of organizational studies, the interest has shifted into what can more generally be called corporate strategy. How can one satisfactorily explain the causes of firms' long-run performance? (MacMillan, et al., 2005). They all share the common theme that it is not structure per se that shapes performance but rather the informal structures - the underlying processes and the people. The field of strategy has moved a long way beyond the tenets of industrial economics. It is no longer held that industry structure is the prime determinant of firm performance: the variance of performance around the industry mean is simply too great. Besides, it is much less clear today than 30 years ago where the 'boundaries' to an industry lie (Aspelund & Moen, 2001). U.S. banks now channel less than 20% of the nation's money flow, having given way to new competitors like supermarkets and pension fund managers. Similarly, competitors with similar strategies, structures, and resources will experience quite different outcomes. One has to look at the 'dominant logic' a management team has adopted to determine its business mode to gain some clues as to how resources are both created and allocated. My early work was done at a time when just a few multinationals were beginning to experiment with some form of a matrix organization. They were the multinationals at the extremes of complexity in the array of products, technologies, geographies, and cultures assembled to deliver returns to shareholders (Moen & Servais, 2002).

They faced the most severe managerial challenges. Since then many others have joined those pioneers. Indeed, Knight & Cavusgil's (2009) 'transnational' organization - a development of my early 'grid' model - was presumed to be the ideal goal for multi- industry players. More recent evidence, however, has shown that the ensuing complexities for firms like ABB acted to reduce margins and erode competitiveness over time. Even attempts to create a 'mental matrix' rather than a structural solution have lacked conviction. Yet, human ingenuity is unrestrained in the face of this challenge of complexity. In organizations that have been dubbed 'metanational', new approaches are visible to the old problem of managing the core asset of the firm -- knowledge (MacMillan, et al., 2005). Better ways to create and meld knowledge across internal boundaries may in turn inspire a whole new generation of organizational 'solutions' to the management of complexity. If the limits of both scale and complexity are pushed back, then perhaps we really will see the trillion-dollar corporation become a reality (Madsen & Servais, 2007).

In addition to these internal process developments, complexity is also being addressed as managers choose different ways to draw a 'boundary' around the assets they plan to own. This is an age of outsourcing, indirect supply chain management, and, most notably, strategic alliances. One does not need to own an asset in order to control it, or at least gain benefit from its existence under someone else's ownership. Whereas the earlier debates about organization were to do with markets vs. hierarchies, today we have to add the role of contracts. It is becoming commonplace for managers to talk about their 'asset ecologies' - those assets that help create value for them (McNaughton & Bell, 2000). Microsoft, it has been estimated, owns a mere four per cent of the assets that create its value. The rest of the value comes from contracts, such as those with IBM.

The consulting firm Accenture has recently estimated that strategic alliances of all types could contribute more than $25 trillion to the revenues of U.S. firms by 2004. It also estimated that a substantial number of the Fortune 500 firms will have 40% of their revenues and profits from alliances (Lumme, et al., 1998). Should this occur, many firms would have to modify quite seriously their approaches to organization. The dominant logic of organizing a hierarchy, albeit a flattening one is quite different from that required to manage collaborative arrangements. Whereas many firms currently regard their alliances as exotic options at the periphery of their empires, tomorrow they will have to create alliance management capabilities as a central plank of their strategies. All these options may serve to add back new complexity for management until the governance provisions and 'logic' are sorted out clearly. How managers go about the task will provide a fruitful and challenging domain for future research (Lautanen, 2000).

The internationalisation process model, Vernon's product life cycle model and various theories of corporate control and coordination have been examined to ascertain what insights they offer to understanding the relationship between FDI and strategy (Mason & Harrison, 1999). The mechanistic nature of the product life cycle and internationalisation process models meant they did not offer a role for strategic decision making either in mode choice or locational choice. The literature addressing corporate governance systems, on the other hand, suggests that FDI, especially that funding wholly-owned subsidiaries, is likely in MNCs that have adopted integrated global structures of governance because of the control this mode offers, control being essential in highly integrated MNCs to ensure that the interdependent subunits behave in a mutually supportive manner.

Identification of a research agenda

Research examining the internationalisation of the Australian economy has focussed primarily on macroeconomic aggregates such as the levels of imports and exports and the growing importance of these in the Australian GDP (Aspelund & Moen, 2001). Relatively little attention has been given to the internationalisation of the economy through offshore production by Australian firms or through production within Australia by foreign multinationals, the exceptions being the McKinsey and Company (1993), Yetton Davis and Swan (1991), Department of Industry, Science and Technology (1994) and Bureau of Industry Economics (1995) (McAuley, 1999).

The dynamic nature of internationalisation, and associated financing methods such as FDI, calls for research that is responsive to the longitudinal character of internationalisation as a development process through time. While it is valuable to study individual events, a more complete picture is supplied when the whole development of a firm from the time of its founding to the present time is examined (Knight, 2006). Hence, a rich, broadly focussed study that results from careful examination of a few organisations over a long period of time may be superior to statistically rigorous but narrowly focussed studies (Knight & Cavusgil, 2009). Stages model of internationalisation, including those of Vahlne and Johanson, Vernon, and evolutionary models of international structure, including those of Stopford and Wells, Franko and Bartlett and Goshal, are based on surveys of manufacturing firms. The internationalisation of service firms and firms that combine goods and services needs more attention (Landstrom, 2004). This observation is highly relevant for Australian scholars as the majority of Australian FDI abroad has been directed to service firms (Johanson & Vahlne, 1990).

Born Global Firms

Even though classic internationalization theories dictate that foreign direct investment (FDI) is mostly the sanctioned by larger, entrenched companies (Caves, 1971, 1996; Chandler, 1990), rapidly falling trade and deal obstacles, technological progress and enhanced information technology in addition to diminished transportation costs have revealed that classic theories do not at all times stand for genuine business performance. Globalization forces and environmental drivers, including increasing market liberalization and advances in information and communication technologies (Bell, et al., 2004) have changed the realities of conducting international business (Cavusgil, et al., 2008).

Research should give attention to new patterns of internationalisation, including that of 'born global' firms. Have McKinsey's 'born global' firms performed as well as those Australian firms that have pursued more traditional, sequential entry methods? Have services firms followed the same pattern? Do Australian firms move more quickly through the exporting stage, or even skip the exporting stage, more rapidly than firms from other countries? If so, do geographic, structural or historical factors explain the difference? Research… READ MORE

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