The stage theories of internationalization reflect a rationale of gradually reducing the risks of internationalization’. Why is this statement formed, and do you agree with this? What are the risks that firms aim to mitigate when internationalizing their
Risks of Internationalisation
Risks of Internationalisation
Internationalisation refers to the tendency of firms to gradually increase operations in foreign countries (Verbeke et al., 2011). Several theories explain the rationale for internationalisation of operations. For instance, the product life cycle theories argue that internationalisation can be attributed to maturity of products (De Jonge & Tomasic, 2017). The stage theories offer a different approach that concentrates on the behaviour of firms as they internationalise. According to Breat (2009), the stage theories reflect a sequential approach that begins with limited activities in foreign market and ends with firms investing in manufacturing facilities. This essay seeks to determine whether the stage theories reflect a rationale for gradually reducing the risks of internationalisation. The paper begins by describing the stage theories of internationalisation and the risks that businesses face as they internationalise. This is followed by an attempt to establish the existence of a link between the stage theories of internationalisation and risk mitigation.
Stage Theories of Internationalisation
The stage theories of internationalisation advocate for an incremental approach to serving foreign markets. The fundamental assumption in the stage theories is that internationalisation is a slow process where firms use a gradual increase in foreign activity to mitigate uncertainty and a lack of market knowledge. According to Andersson and Holm (2010), the stage theories came about as a response to the contemporary models that were based on neo-classical economic theory. While the contemporary models looked at the decision on whether to invest or not, the stage theories focused on a firm’s investment behaviour over time. The noticeable influence of the stage models in internationalisation behaviour of firms since the late 1970’s is an indication of the legitimacy of the stage theories (Andersson & Holm, 2010).
The Uppsala model is one of the most recognised models of internationalisation that falls under the stage theories. The model was advanced by Johanson and Vahlne, and it argues that international expansion is a learning-oriented process that is recognisable by different incremental phases (Daidj, 2014). According to the model, internationalisation begins with a lack of regular export activities. This phase is followed by export activities that are facilitated by independent representatives. These might be local businesses that recognise a market need that can only be satisfied by importing products. A gradual increase in exports allows a firm to recognise a foreign market opportunity which leads to the third step in the Uppsala Model. Here, a business establishes an overseas subsidiary that manages sales operations. An increase in sales and a better understanding of the foreign market then allows the firm to establish subsidiaries that produce and manufacture products (Daidj, 2014).
Like the Uppsala model, the innovation model of internationalisation views international expansion as an incremental process. Firms focus on proceeding from one step to another while obtaining the knowledge and experience on how to operate in a specified market (Cavusgil & Knight, 2009). The incremental internationalisation is an acknowledgement that management cannot obtain market information as quickly as they want. As in the case of the Uppsala model, the innovation model is focused on the behaviour of firms as they enter into new markets (Cavusgil & Knight, 2009). The key difference is that innovation is the driver of internationalisation in the innovation model.
Risks That Firms Aim To Mitigate When Internationalising
Operations management defines the activities of a firm that are related to design, planning, and control of resources to transform them into both goods and services. International operations management differs from domestic international management due to the complexity of internationalisation. While internationalisation allows a firm to take advantage of factors like access to cheap capital, reduced costs and economies of scale, it also exposes a firm to numerous risks that need to mitigated (Ramamurti 2012). Strategic risk is one of the significant risks that originates from a firm’s internal environment. Strategic risk defines the risk that comes with the strategic decision to increase involvement in international markets. The risk comes in the form of poor decisions that might be made without considering market realities (Kogan & Tapiero, 2007). For instance, a business might decide to expand to a new market because its local rival has plans to serve that new market. Another example of strategic risk is poor execution of decisions. Also, a firm might fail in resource allocation and responding to changes that occur in the business environment. It is evident that firms that seek to internationalise must find a way to mitigate the strategic risks that they face.
In a survey of SMEs that wanted to internationalise, Kubickova and Toulova (2013) sought to identify the risk factors in the internationalisation process. The survey identified fourteen major sources of risk that can be categorised into economic, socio-cultural, political, and technological risks. Examples of economic risks that would have an impact on internationalisation include the excessive costs of transporting goods to a new market, lack of capital, exchange rate risks, and foreign competitors. In the case of lack of capital, internationalisation might require a business to seek credit to fund ventures into foreign markets. It is acceptable that firms cannot predict whether their foreign ventures will be successful. Therefore, the decision to seek capital carries risks that might harm operations if the foreign venture fails. Despite improvements in transportation across much of the world, the costs can vary significantly across boundaries (Kubickova & Toulova, 2013). This is an economic risk that has to be considered. Other relevant economic risks are inflation, interest rates, and foreign exchange rates. These are factors that are outside the control of a business but which the business has to find ways to mitigate.
Lack of information about a foreign market was cited as one of the main socio-cultural risks (Kubickova & Toulova, 2013). High demand for a product in the home market does not automatically mean that there will be demand for the same product in a neighbouring country. As such, a firm has to conduct market research that will look into the tastes and preferences of the target market. This research might take valuable time and resources, and the results might be disappointing to the business seeking to internationalise operations. A lack of demand might convince the business to create new products for the foreign market. This decision also adds to the risks of internationalisation.
Political factors also create risks that firms attempt to mitigate in the process of internationalisation. A relevant example of a political risk is the recent withdrawal of the US from the Trans- Pacific Partnership which would have been the biggest free trade agreement in history (Granville, 2017). The withdrawal weakened a deal that would have eliminated tariffs, opened investment opportunities, promoted job growth, and facilitated regional supply chains (Department of Foreign Affairs and Trade, 2016). Brexit represents a similar example of how changes in the political environment can affect internationalisation. In addition to these, internationalisation also forces firms to adhere to new health, technical, and safety standards. It is evident that a business that undertakes internationalisation will be exposed to a wide range of political risks.
Internationalisation also requires a firm to mitigate technological risks. It is apparent that a business will need to increase its output in order to serve a foreign market. This might require large investments in existing technologies. Unforeseen technological advances can radically affect an industry and lead to writing off of the massive investment in existing technologies. There is also the challenge of improving quality while maintaining prices (Kubickova & Toulova, 2013). As firms internationalise, they have to ensure that they leverage the best technology that would make them competitive in both the domestic and foreign markets. As such, internationalisation requires firms to mitigate technological risks.
How Internationalisation Stages Help to Mitigate the Risks of Internationalisation
The statement that the stage theories of internationalisation reflect a rationale for reducing the risks of internationalisation is formed because of the incremental nature of the stage theories. A firm can decide to build a manufacturing hub in a foreign country that was not previously served. This decision exposes the company to considerable strategic, economic, political, socio-cultural, and technological risks. The use of the stage theories eliminates much of the risks by taking an incremental approach where a firm learns about the new operating environment as it increases levels of activity. It is, therefore, correct to state that the stage theories reflect a rationale of gradually reducing the risks of internationalisation. The correctness of the statement can also be confirmed by looking at how the distinct stages help to mitigate risks.
As stated, the first stage in the U-models is characterised by a lack of regular export activities. Berkema, Bell and Pennings (1996) argue that firms in this initial stage of internationalisation prefer proximate countries that share the same culture. This reflects a desire to reduce risks. For example, an Australian firm would start the process of internationalisation with irregular exports to New Zealand which is proximate and whose culture is largely similar to the Australian Culture. The risks of this initial activity would be inconsequential while the returns would also be small. However, the Australian firm would learn whether the existing supply chain and logistics operations would support regular export activities. At the same time, the company will identify the small differences in the cultural, economic, political, and technological environments. Knowledge of these factors allows a firm to determine the viability of increased activities. In this case, the first stage in the model allows the firm to begin understanding the risks that it will face if it chooses to increase activities in a foreign market.
The second stage in the Uppsala model comprises exports via independent representatives. In this case, the firm increases operations in a new market without having to make significant changes to its logistical operations. At this stage, a lack of market knowledge and resources are the factors that prevent a rapid increase in activity. The second stage serves an important role in understanding the levels of demand for particular products and services. Therefore, a firm mitigates strategic risk and would be confident in making investments in the foreign market. The third stage in the model will involve the establishment of foreign sales subsidiaries. This stage carries risks, but a better understanding of the market that comes from the initial stages allows the business to be strategic in its actions. The third stage plays a pivotal role in allowing the firm to establish direct contact with customers. The business also learns about government regulations and how they affect foreign firms. At the same time, a firm gains experience on how to navigate economic risks like foreign exchange risks. It is evident that as a firm goes through the distinct stages, it acquires more knowledge and reduces the levels of uncertainty. The accumulation of knowledge allows for a smooth transition into the final stage of internationalisation. The firm invests in overseas production because it has identified and ranked the risks that it will face in the overseas market. The incremental acquisition of knowledge and experience supports the statement that the stage theories reflect a rationale for a gradual reduction of the risks of internationalisation.
This essay defines the stage theories of internationalisation. The essay notes that firms face numerous risks when seeking to internationalise. These include strategic, operational, economic, political, technological, and socio-cultural risks. It is found that the stage model plays a significant role in mitigating these risks. This is because the stage models are learning-oriented where a firm obtains incremental knowledge and experience on an overseas market. The learning-oriented nature of the stage models supports the statement that the models reflect a rationale of gradually reducing the risks of internationalisation.
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