The World is Spiky – Th I t ti li ti The Internationalization Process

The World is Spiky –
The Internationalization
ti ti
Process
Torben Pedersen
Professor
Center for Strategic Management and Globalisation
Copenhagen Business School
tp.smg@cbs.dk

A little about me…
Education: PhD, Copenhagen Business School, 1994
Guest reseacher: Sweden (Gothenburg), Austria
(Vienna), Finland (Helsinki), New Zeland (Auckland),
USA (Stanford, Rutgers), Australia (AGSM and
UNSW), Spain (Valencia), Italy (Bocconi and Padova)
Research interests:
• International Business Strategy
• Globalization, offshoring and outsourcing
• Knowledge management/governance
• Internationalization process

Structure of seminars
1. Today: The world is spiky
• Local responsiveness
• Internationalization Process
• Case illustrations: Ribe and Danfoss
2. Tomorrow: The world is flat
• Global integration
• Offshoring
• Case illustrations: Ecco and Vestas

Who cares whether the
world is spiky or flat?

Implications for business strategy
The best way to organize a firm depends
on the nature of the environment to
which the firm must relate
The environment is the exogenous
variable while strategy and structure
are endogenous ones

Two types of competitive pressure
coming from the environment
1. Pressures for local adaptation – the spiky world
2. Pressures for cost reductions through global
integration – the flat world
– Conflicting and contradictory; being locally
responsive can make it difficult to reap benefits
of global l integration
ti
• Often expressed as the ’local vs global’ (or
integration vs responsiveness) dilemma

GM’s Global Brand Hierarchy
Global
International
Europe, Middle East,
Asia
North America,
Middle East, Europe
North America, Asia
North America
North America
Local
United Kingdom Australia Korea

Globalization
- Please, where do you see the signs
of globalization in everyday life?

Signs of globalization
• The financial crisis
• The internet
• China and India
• Environmental problems
• Travelling (air-traffic)
• Container transport
• English as the global language
• Multi-ethnic societies

Flat world?
Does this mean that we live in a flat
world without any major spatial
barriers?
Is it equally easy to conduct business
in Catania, Veneto region, Denmark,
China or Kazakhstan?

Probably bl not
– and why not?

Still many differences

International versus domestic activities

Nature of differences
• Cultural
• Administrative (political context,
regulation, standards d and levels l of
corruption)
• Geographical g p (time zone, climate)
• Economic (levels of economic and
technical development)

Cultural differences
• Culture refers to learned, shared, and
enduring orientations of a society,
which are expressed in values, ideas,
attitudes, behaviors, and other
meaningful symbols and artifacts
“the collective mental programming of people”

Cross-cultural encounters
Why problematic?
artifacts, including behavior
mental maps (person schemas, person-in-situation
schemas, self-schemas, scripts, cognitive maps)
values
In a society: people share values, mental maps
==> easy to function

Differences matters
• When developing products and services
• Interaction with foreign business
partners
• Selection foreign distributors
• Business negotiations
• Dealing with customers
• Preparing for trade fairs
• Preparing promotional materials

Cannot use knowledge from one
market in another market – at
least not the key knowledge that
really matter when conducting
business abroad?

Pressures for Local Adaptation
• Diversity of local customer needs. Businesses, such as clothing and
food, require significant adaptation to local customer needs.
• Differences in distribution channels. Small retailers in Japan
understand local customs and needs, so locally responsive MNEs use
them.
• Local competition.
When competing against numerous local rivals,
centrally-controlled MNEs will have difficulty gaining market share with
global products that are not adapted to local needs.
• Cultural differences. For those products where cultural differences are
important, such as clothing and furniture, local managers require
considerable freedom from HQ to adapt the product and marketing.
• Host government requirements and regulations. When governments
impose trade barriers or complex business regulations, it can halt or
reverse the competitive threat of foreign firms.

Internationalization Process Model
• Psychic distance
– Unfamiliarity because of differences in
language, culture, business practice and
political systems
• Psychic distance disturb the flow of
y
information between a firm and its market

“Lack of knowledge about foreign
markets and operations are the main
obstacle to the development of
international operations and the
necessary knowledge can be
acquired mainly through h operations
abroad”
(Johanson & Vahlne, 1977)

The mechanism of internationalization
-
Increased market knowledge
Market risk = uncertainty x market investments
+
Willingness to increase market commitment
Interplay between knowledge and commitment

Implications
• Successful foreign expansion is a costly and timeconsuming
process (no short-cuts), as experiential
knowledge is:
– difficult to acquire
– difficult to integrate if acquired
• Internationalization is a process of cultural learning,
as it reduces psychic distance
• Internationalization is often a reactive process rather
than an proactive process

What is the order of entry?
• Firms will start their internationalization in
markets with lowest psychic distance, as they
can understand d these markets -> low
uncertainty
• With increasing i experiential knowledge the firm
will expand into markets with greater psychic
distance
– Like rings in the water

The stages model (Establishment chain)
Sporadic
Foreign
Sales
Assembly
Production
export intermediary subsidiary production subsidiary
The usual pattern of gradually increasing
The usual pattern of gradually increasing
resource commitment on the foreign markets

Resource commitment
to foreign sales
(The Establishment Chain phenomenon)
The Operational level of the Uppsala Model
Equity
(FDI)
Contractual
(outsourcing)
Market knowledge accumulation
Arm’s length
(procurement)
Market knowledge accumulation
Local
Regional
Global
Geographical expansion
of sales
(The Psychic Distance
phenomenon)

Extensions of the original
(Uppsala) model of the
Internationalization Process

Petersen et. al., 2008
• Not all firms are equally good at learning:
• The absorptive capacity matters e.g. setting
up systems and architecture
• The perception of the performance of the
foreign venture matters
• It is typically not a smooth and linear learning
process, but rather a bumpy and complicated
learning process

Overconfidence
0,4
Perceived knowledge gap in a
foreign market
0,35
03 0,3
0,25
0,2
0,15
0,1
0,05
0
0 1 2 3 4 5 6 7 8 9
Elapsed time in years

Oviatt and McDougall, 1994
• International New Ventures / Born Global’s are
able to speed up the internationalization
process:
• Managers might have gained international
experience
• Use other less resource demanding entry
modes
• Focus more on growth opportunities

Internationalization ti ti process
Born Globals
l
model
Internationalization
ti ti Reactive
Proactive opportunity seeking
strategic posture
Resource access and
Internalization, i internal
Selective ownership,
control
development
mobilized through networks
Criteria for choosing
foreign markets
Importance of
management’s experience
Nature of path dependency
Minimize difference between
existing activities and new ones
Does not matter
Each market entry creates a
path dependency for growth
Maximize the growth
potential
Crucial factor for early and
rapid internationalization
Early internationalization
instills a path dependency for
international growth

Take-aways
• Two conflicting forces for: local adaptation
versus global integration – as implied by the
spiky versus flat world
• Clearly, some spikiness in the world – need
for local adaptation
• The internationalization process typically a
slow time consuming process fueled by
learning in the local market
• However, systematic learning and the
pursuing of growth opportunities speed up the
process