Abstract

International economic integration is one of the means for an increase in welfare. This work provides some of the theories that have sought to explain why international enterprises exist, with special emphasis on the transaction costs/internalization approach. This work also uses a strategy analysis framework to look at the key strategic issues facing businesses in global context. “The efficient transaction of international business is made more challenging because of several kinds of obstacles—geographical, financial, legal/political, and cultural” (Gomez and Monti 12). Therefore, business strategy involves identifying and exploiting the resources and capabilities of the firm in the marketplace for the purpose of gaining competitive advantage and superior financial performance. This paper examines international business activity in America. The structure of this work follows a fairly standard format of examining first the historical context in which international business takes place in America, followed by subcategories of analysis by issue.

An Analysis of the Globalization of American Businesses

The defining aspect of international strategy is that it involves expansion of the operating horizon of the enterprise beyond the borders of the home nation. Through a combination of trade, licensing, alliance, and foreign direct investment, the companies accesses customers and factors of production that are not available to the domestic firm. It also encounters competitive conditions and rival firms that would not affect the domestic company in a domestic business. From these unique encounters with the international environment, the company may finally develop a set of capabilities and competencies that it would otherwise never see.

International strategy issues for every business arise once a company makes the first step toward globalization—geographic spread. The early academic literature focused on exports as the minimum requirement to become an international company and foreign direct investment as a stricter requirement (e.g. Dunning 1988). Today, with internationalization of not just sales or production, but of other parts of the business system such as procurement or research, and with the advent of the Internet, we consider internationalization to occur with any cross-border geographic spread of activities, whether physically or electronically (Johansson 45).

Globalization has become more a matter of perceptual horizons and the scope of strategic intent than of specific means for foreign market entry. In the future, even the breadth of strategic vision will be subordinated to global access, not of the firm to the market, but of the international market to the firm. After all, most Internet-based companies are today born global whether or not they intend it. Amazon.com was making sales to international customers even before it created customized non-US websites. Globalization is now, more than ever, a matter of degree.

Most academic literature has focused on the question of why businesses should go international. If you speak to managers today, their question is seldom that of, ‘should we go international?’, but rather is, ‘why should we not?’ and ‘what is the best way to do so?’ Perhaps the best example of failure to internationalize at the right time is provided by RCA, the original commercializer of television sets. Rather than go international, it sold the international rights to production, only to find decades later that its domestic business was almost entirely captured by foreign producers. Today’s far faster moving markets imply that not going international incurs very severe competitive risks.

A common top consideration for most businesses as they expand geographically, whether locally, nationally, or internationally, is the desire to access larger markets. Even large domestic markets will be saturated by the successful firm as it expands distribution, increases its product range, develops new manufacturing sites, and so forth. Such a company, however, is likely to possess at least some resources that are not completely engaged, particularly managerial resources that increase with application and learning so that they can organize ever larger operations efficiently. Once the national market is filled, the business firm will turn to international markets. Of course, this is an extreme and theoretical sequence. The reality of many companies is that they turn rapidly to international markets, even as they expand domestically. The outcome and objectives are the same, though, whether a company waits to fill every accessible corner of its national market or is looking to international possibilities early in its history. Larger operations open the way for economies of scale and scope, faster access to learning curve effects, market power as buyer and supplier, and other benefits of size. As technology has improved, the efficient scale of more and more industries has become larger than any one market, even those of the largest industrial nations, can absorb. Therefore, increasing geographical spread allows firms to become more efficient and thus more competitive, while at the same time providing them with the market power to dominate smaller, weaker, less widespread competitors (Conn and Yip 45).

Companies that own or access unique resources and capabilities find that international expansion gives them vast new opportunities to leverage these expensive and valuable skills. A variety of studies have shown that for American businesses (Hitt, Hoskisson, and Kim 1997), international expansion leads to greater profitability, presumably because they can leverage such resources. Competencies typically involve large investments in capital and managerial energy, incurring high fixed costs. Firms that can expand their operations widely can earn greater returns to these investments, while potentially improving the competencies through previously unconsidered applications. International markets offer many of the advantages of product proliferation while allowing the firm to remain in its primary line of business.

In today’s business world, asset-seeking investment is moving away from traditional natural resource endowments. More firms go abroad to access constructed, or man-made assets. Porter (1990) focuses on the role of social institutions in developing home country advantages that can be exploited in foreign markets, but it is equally the case that international expansion can access location-bound competencies that have developed in other countries. So, asset-seeking expansion may be looking for skilled labor educated and conditioned in foreign systems, technologies that have arisen in foreign industrial clusters, or business processes that are embedded in a foreign location. Companies may also seek institutional conditions more friendly to their activities, moving their financing arms to financial centers, production to areas with less restrictive labor laws, or research to countries with strong intellectual property rights enforcement.

Another consideration in international expansion is risk reduction, whether financial, business, or environmental. International expansion offers the opportunity to move into markets that are not perfectly in phase with the home market. We see in 2000, for instance, that the US economy is booming, but perhaps nearing the end of an up-cycle; that Western Europe is edging out of a period of stagnation or recession; and that East Asia is recovering, rapidly at times, from the 1997 crash. In the same way that product portfolio strategies are used to reduce cash flow variances, international market portfolio strategies can be used to manage diversifiable risks. Access to a broader base of financial markets may also reduce the basic market risk. Recent studies have shown that international spread reduces financial betas for firms, but also have shown that volatile currency markets have vastly increased the impact of exchange risk, so that the net variance in cash flows is higher today for international firms (Reeb, Kwok, and Baek 1998). This empirical evidence suggests that firms can simultaneously increase returns to fixed assets and take a portfolio approach to financial risk management by increased internationalization.

Firms usually need an initial competitive advantage that they can leverage into international markets. Recent research by Yip, Gomez, and Monti (2000) shows that for newly internationalizing firms, the initial competitive advantage is the single greatest determinant of international success, outweighing the process used in internationalization. In the case of geographic expansion, this advantage need only be relative to each specific country entered. Hence, a firm with weak competitive advantages at home may still have a competitive advantage in foreign markets. This would be particularly the case for American firms moving from more developed economies to less developed ones:

Firms selling ‘down’ to less developed economies (which usually but not always have less demanding markets) find it relatively easy to have a competitive advantage in the entered market. Firms selling ‘sideways’ to economies of similar development need to work a bit to create an advantage perhaps through local adaptation. Lastly, firms selling ‘up’ to more developed economies have to work really hard to establish a competitive advantage, perhaps through lower prices or by focusing on a market niche (Gomez and Monti 34)

In expansion, two types of strategic options arise: first, the choice of foreign country or region to enter, and second, the type of entry or participation mode. Choice of country to enter depends first on attractiveness analysis. But after several individual countries have been analyzed, a method needs to be applied to choose among them, or at least for the sequence of entry. Recent developments in globalization make the issue of sequence less germane. In an era of low transportation, poor communications, high trade barriers, and large differences between countries, corporations had to take each country more or less one at a time. In the modern era of rapid transportation, instant electronic communications, low trade barriers, and converging country conditions, businesses increasingly seek simultaneous rather than sequential international expansion. The ultimate case was provided by Microsoft’s launch of Windows 95, which became the first major product in any category to be launched in virtually every country of the world on the same day. That has become the new standard. Again, Internet-based products achieve global reach even more quickly, with zero time lags. The era of global strategies also requires companies to look beyond country-by-country choices on the basis of standalone attractiveness. Instead they also need to consider the global strategic importance of countries.

As firms move into international markets, they soon discover that all potential customers do not have identical needs and desires. International expansion is often based, at least initially, on exports or licenses that provide goods identical to those sold at home to customers abroad. In many cases, though, firms find that foreign customers actually prefer somewhat different products, and that adapting their outputs to local tastes and preferences provides considerable competitive advantage in local markets. This is particularly appropriate for products with high cultural content, such as foods or personal-care products.

So the longstanding conventional wisdom has been that the wise companies will adapt to demand, not continue to sell standard offerings. Political pressures may be high for products that, while lacking any need for different characteristics, might be seen as strategic goods. This category often includes defense equipment, but may also be extended to various technology intensive categories—computers, software, telecommunications, transportation, and many others—that are seen as critical to the nation’s functioning. These categories also offer opportunities to improve the technology base of the host nation if production takes place locally, involving local scientists, engineers, technicians, and managers. Therefore, host governments often prefer local operations in what they consider sensitive industries (Douglas and Craig 23).

Globalization is generally defined as integrating the activities of the firms across international markets. Traditionally, globalization has been seen as a strategy concerned primarily with efficiency goals. This ‘simple global’ strategy was characterized by Bartlett and Ghoshal (1989) as a ‘Japanese’ strategy of efficient production and central control. More recently, though, global integration is recognized as important to differentiation strategies, providing more unique, more usable, more effective goods and services through the impact of multiple markets, superior intellectual inputs, and new organizational competencies. Without integration, firms act as national firms in multiple markets. While this strategy may exploit certain firm-specific resources more widely, it limits the ultimate ability of the company to take advantage of its geographic spread. Differentiating activities from location to location while tying these various operations together through corporate level processes can provide considerable cost benefits. They can also generate new capabilities that are based on combinations of skills and resources from many places. Both efficiency and superior product offerings often are enhanced by integrating operations around the world (Ohmae 45).

Businesses can also access resources and build capabilities through international expansion. While many firms go abroad seeking new, more accessible markets, others  go abroad to access resources that are in short supply in the home market. This was true historically of natural resource firms—if RTZ mines copper, they must locate mines where there is copper in deposits rich enough for economical extraction. Agricultural product firms such as Dole make millions growing bananas and other tropical fruits, but must locate (or access) production facilities in the tropics to do so. Other firms move abroad in search of less expensive labor in overpopulated developing countries, as has been seen historically for American firms locating plants in Mexico or South East Asia. Essentially, access to traditional sources of comparative advantage—cheap land, labor, or resources—is a key objective of many internationalization moves. Many such companies still see themselves as essentially domestic, but they are actually totally reliant on international sources of supply for their domestic markets. When the resources cannot move to the producer, the producer must move to the resources. We will see that this move may be through market arrangements, alliance, or foreign ownership, much like market access, but the means and the objectives are not identical (Reeb, Kwok, and Baek 34).

International business involves a specific set of issues. These international strategy issues involve (1) increasing geographic spread (often referred to as ‘internationalization’), (2) achieving local adaptation (often referred to as ‘responsiveness’), (3) building global integration (sometimes referred to as ‘globalization’ or ‘global strategy’), and (4) multi-business, multi-country, and often multi-firm issues such as international strategic alliances and global mergers and acquisitions (Yip 118). In general, the more basic issues in international strategy require more use of the more basic issues in strategy analysis. Adaptation and integration are driven largely by issues developed through competitive analysis and resource assessment, while integration must also consider issues revealed by different means of assessing strategic conditions and opportunities.

Works Cited

Conn, H. P., and Yip, G. S. ‘Global Transfer of Critical Capabilities’, Business Horizons, 40/1 (Jan.-Feb.), 1997.

Douglas, Susan P., and Craig, C. Samuel. ‘Evolution of Global Marketing Strategy: Scale, Scope and Synergy’, Columbia Journal of World Business, 24/3 (Fall), 1989.

Dunning, John H.. ‘The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions’, Journal of International Business Studies, (Spring), 1988.

Gomez, J. B., and Monti, J. ‘Role of the Internationalization Process in the Performance of Newly Internationalizing Firms’, Journal of International Marketing, 2000.

Hitt, Michael A., Hoskisson, Robert E., and Kim, Hicheon. ‘International Diversification: Effects on Innovation and Firm Performance in Product-Diversified Firms’, Academy of Management Journal, 40, 1997.

Johansson, Johny K. ‘Exploiting Globalization Potential: US and Japanese Strategies’, Strategic Management Journal, 15 (Oct.), 1994.

Ohmae, Kenichi.  ‘Managing in a Borderless World’, Harvard Business Review, (May/ June), 1989.

Porter, Michael E. The Competitive Advantage of Nations. New York: Free Press, 1990.

Reeb, David M., Kwok, Chuck C. Y., and Baek, H. Young. ‘Systematic Risk of the Multinational Corporation’, Journal of International Business Studies, 29: 1998.

Yip, George S. Total Global Strategy: Managing for Worldwide Competitive Advantage. Englewood Cliffs, NJ: Prentice Hall, 1992.