Motives for Internationalisation

The aim of this Chapter is to clarify that internationalisation is not always driven by the desire to enhance sales, but that the motives for internationalisation can be manifold, with major consequences for market entry strategies, the coordination of international subsidiaries, country selection, organisation, etc.

Heterogeneous Strategic Objectives for Internationalisation

Internationalisation into specific foreign countries, whether it is via exporting or importing, international contracts or foreign direct investment, is always driven by certain motives of the part of an MNC. In this regard, it can be assumed that the strategic conduct of a company in a particular country is always shaped by its strategic objectives with regard to this country, as an important part of the intended strategy.

However, the literature on internationalisation often fails to differentiate between the respective objectives, assuming, often only implicitly, that salesoriented objectives are the most relevant. The term market entry strategy, which is often used for the foreign operation mode, clearly indicates this assumption. Traditional concepts and studies on internationalisation (e.g. the theory of monopolistic advantage by Hymer (1978)) often assumed that companies' international activities only give them the benefit of a broader exploitation of company-specific advantages. However, very different internationalisation objective exist. As already stated in the international product lifecycle theory by Vernon (1966), the production cost advantages of a foreign market might be an important reason for relocating production to foreign countries, even if the primary sales focus is still on the home country.

In the perspective of the MNC as a differentiated network, as discussed in Chapter 1, different subsidiaries are assigned different tasks and roles, and heterogeneous location advantages of the different foreign subsidiaries are exploited. This perspective clearly illustrates the multi-faceted nature of the motives for being active in foreign countries.

The five motives shown in Figure 4.1 are the most relevant objectives of internationalisation (see, e.g., Dunning 1988; Shan 1991, p. 562; Morschett 2007, pp. 310-320; Dunning/Lundan 2008, pp. 67-77).

Figure 4.1

Market Seeking

The primary motive for starting activities in a foreign country is frequently the access to new markets and the sales potential offered by foreign markets. When the home market is saturated, as is increasingly the case for the industrialised countries of Western Europe, the USA or Japan, company growth can be maintained through international sales.

When market seeking is the motive, foreign countries are chosen by the sales potential they offer for the company. Country characteristics used as selection criteria in this case include (Grünig/Morschett 2012, pp. 97-112):

■ market size

■ market growth

■ presence of attractive customer segments

■ demand for the products or services of the company.

International market seeking objectives are not necessarily associated with foreign production; they may also be reached by home-country production that is being exported to the foreign market. While exporting can be used to exploit excess production capacity in the home country, and is usually less risky and can be carried out with lower initial investment, FDI in the target market can help to circumvent trade barriers, reduce logistics costs and develop a better understanding of the market. These scenarios are discussed in more detail in Chapter 19.

Given that access to a foreign market is not always easy and market knowledge of a foreign company is usually lower than that of a local company, first market entries are often achieved via cooperative arrangements with local companies (Erramilli/Rao 1990, p. 146). Local companies may provide the company with the necessary knowledge about the market, with access to distribution channels and with other local relations.

However, considering the significance of customer relations, in recent years companies on both a national and international level have tended to exert a tighter control over their foreign sales activities and are willing to use a higher level of ownership of these activities to provide the necessary coordination. Internalisation of these foreign marketing activities, i.e. vertical integration, and a full-ownership strategy instead of cooperative arrangements, are often the consequence. The reason is that a foreign subsidiary acts as a gatekeeper to the local market, which gives it a specific power versus the company in the home country, in particular when it controls distribution channels, marketing activities, etc.

The theory of this dynamic development, which is shaped by a low level of market knowledge in early phases of market entry (and, thus, often cooperative entry modes to facilitate the market entry), increasing market knowledge over time and the wish to exert a stronger control over activities (and in consequence a preference for full ownership of the subsidiary), is explained via internationalisation stage models, which are discussed in more detail in Chapter 6.

 
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