"Global interdependence is pervasive. It is not only political and military….[but] also environmental…. Perhaps the most important aspect of interdependence however is economic." (Terpstra, 1993, Preface)
Today more and more firms operate internationally and in some cases even globally. In almost all major economies of the world, the significance of domestic and/or foreign-based transnational corporations is increasing. Such corporations, directly or indirectly, account for a large part of world trade in goods and services (cf. Nilsson, Dicken 1996 p.1).
Attempts to theorise such international developments are widespread; therefore, there is no such thing as a "universal" theory. However, the emphasis of most theories tends to be on how businesses should internationalise rather than on why they should do so. Most contributions in literature focus on strategies and structures of international firms but do not explain the reasons of internationalisation.
The main aim of this essay is therefore to give an outline of the reasons why companies choose to go international. Using only relevant theories and different examples from business, it shall be demonstrated that there is not only "one" motive for companies to choose international expansion but that there is a variety of causes depending on the respective internal and external environment of the different companies.
In the following, under II.) there will be an overview of different reasons for companies to choose international expansion; these reasons will be substantiated by different statements and theories from literature and in each case illustrated by relevant examples. Under III.) finally, there will be a conclusion. The expositions of II.) will be analysed and a prospect into the future of globalisation will be made.
II.) Reasons for internationalisation in theory and examples
Throughout literature, there are manifold suggestions for reasons why companies choose or should choose to internationalise their market activities.
Often the main reason for internationalisation is stated as the need of companies to be able to stay competitive in their respective environment. This theoretical approach is often referred to as the "network approach". The theory examines the process of internationalisation by applying a network perspective (cf. Johanson & Vahlne, 1990). Internationalisation is defined as developing networks of business relationships in other countries through extension, penetration and integration (Johanson & Mattsson 1988). Extension refers to investments in networks that are new to the firm, whereas penetration means developing positions and increasing resource commitments in networks which the firm already is involved with.
Integration can be understood as the co-ordination of different national networks. Thus, if the relationships between firms are seen as a network, it can be argued that firms internationalise because other firms in their (inter) national network are doing so. Within the industrial system, firms engaged in the production, distribution and use of goods and services depend on each other due to specialisation. However, certain industries or types of markets are more likely to be internationalised, given the configuration of the world economy (Buckley & Ghauri 1993; Anderson 1993). Under the prospect of this approach, Johanson & Mattsson distinguish four types of international firms: The early starter, the late starter, the lonely international and the international among others. To which of these categories a firm is referred to depends on both the level of internationalisation of the network and the level of internationalisation of the firm. A diagram shall visualise this categorization:
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Figure 1: Internationalisation and the network model (Johanson & Mattsson 1988)
It is important for firms not to end up as a "late starter", because this would mean a severe disadvantage compared to competitors. In my opinion, a good example of this type of internationalisation is the international car industry. As e.g. the German car manufacturer Volkswagen chooses to enter more and more international markets, many smaller suppliers are also forced to internationalise their activities because they are connected to Volkswagen through an interdependent network of relationships. If these small or medium-sized suppliers do not want to risk a loosening of these network connections (and therefore competitive disadvantages), they are determined to follow Volkswagen's international steps.
From my point of view, a further important motive for choosing globalisation of activities is the fact that companies are increasingly faced with foreign competitors in their domestic market. In order to keep up with these competitors who often pursue a very aggressive policy to gain market share it is advisable for domestic firms to also focus on international markets. This will give them the opportunity to react more efficiently to unforeseen measures of the foreign competitor; i.e. better opportunities to exert retaliation.
A very good example for this is the case of Michelin versus Goodyear (as stated by Kim & Wang, 1992). The North American subsidiary of Michelin decided to expand its share in the North American home market of Goodyear by lowering the price of its tyres. Michelin presumed that Goodyear could not match this step because of the significance of the North American sales for its activities; this presumption was indeed correct. However, because of its global activities, Goodyear was able to counter Michelin's move not directly but indirectly by dropping the price of its tyres in "Michelin's profit sanctuary, Europe" (Kim & Wang, in: Czinkota & Ronkainen, 1995, p. 76). This, because of the oligopolistic nature of the tyre industry, caused a "nontrivial negative impact on Michelin's main cash source" (Kim & Wang, in: Czinkota & Ronkainen, 1995, p. 76), causing the firm to take back the North American price drop and virtually rendering its marketing tactic a useless and costly measure. This example clearly demonstrates how internationalisation can be helpful to repulse aggressive foreign competitors by indirect retaliation, especially in oligopolistic markets, which become more and more frequent.
Another reason, or better-expressed crucial incentive, for firms to think internationally is the general change of the economic climate in the world. This makes it much more easier for companies to internationalise their activities because they do not face the strong market entry barriers which used to prevent them from taking global steps. "As the world has become more economically interdependent and is has become obvious that much of the economic success of countries such as South Korea, Singapore and Taiwan are tied to foreign investments, countries are viewing foreign investment as a means of economic growth." (Cateora & Ghauri, 2000, p. 51). Only some years ago, during the cold war, really global activities were difficult to achieve for a firm because of the division of the world into two different ideological parts, not only politically but also economically. The end of the cold war, and following this, the opening of the eastern countries for capitalism, meant a significant shift for many companies. "An increasing number of countries are encouraging foreign investment with specific guidelines aimed towards economic goals. Multinational corporations may be expected to create local employment, transfer technology, generate export sales, stimulate growth and development of local industry…." (Cateora & Ghauri, 2000, p. 54).