International Business Limitations

Theories of Internationalization

• Internationalization is the process of increasing the involvement of enterprises in international markets.
• It involves entry into new markets, variation and standardization of products, and changes in mode of operations.

Stages Theory of Internationalization

• The theory argues that for a firm to gain successive entry into foreign markets, it ought to proceed in a consistent step-wise fashion.
• Internationalization is seen as a slow and gradual process, with close markets explored before more distant countries/markets are considered.
• Through accumulated experiential knowledge, more resources are committed to the foreign market.

Typical Internationalization Process

• Begins from the domestic market, entering first neighboring and environmentally similar markets.
• Goals are not clearly defined at the beginning, but profit goals assume importance with experimental success.
• Products gradually increase in types and variants, reflecting adaptation to requirements of specific markets.
• Entry modes progress from responding to unsolicited and sporadic export orders to establishment of sales subsidiaries and/or production units in selected markets.
• Organization evolves from occasional tasks of a single person to a full-time job of a marketing officer, and eventually, an international division.
• Management commitment grows gradually with experience and success.

Limitations of the Stages Theory

• The impression that internationalization is inevitably progressive, consistently cumulative, and irreversible is not always true.
• Firms may leap-frog into later stages by strategic moves conditioned by internal and external changes.
• Internationalization process may be slow if firms base their international decisions largely on experiential learning.
• The choice of entry strategies/modes does not always correspond to the sequential step-by-step approach.
• Firms may take similarities between neighboring countries for granted.
• The idea of having a strong domestic market base before venturing into international markets may not be applicable in most developing countries.

Network Theory

• A given market is seen as a network of relationships, and internationalization is achieved by firms through the development of business relationships with actors abroad.
• Actors may be individuals, departments in a company, whole companies, or groups of companies.
• The roles and strengths of the actors are identified to understand possible constraints and opportunities for operations.
• Positioned within the foreign network, the internationalized firms develop further relationships or linkages with other actors.

Attributes of Network Theory

• Parties build mutual trust and confidence in each other's ability and willingness to fulfill their respective commitments.
• Mutual learning and knowledge concerning areas of resources, marketing, organization, and developing possibilities accrue.
• Reliance on complementary resources of partners is essential.
• Information flow is more comprehensive and reliable.
• Parties adapt to each other's needs and gradually become interdependent because of the possession of high degree of mutually beneficial assets.

Merits of Network Theory

• Useful in gaining market-specific knowledge and valuable as a source for market entry.
• Firms that pursue opportunities in foreign markets enabled by network resources experience greater international growth.
• Firms can gain access to other firms' experiential knowledge without necessarily going through the same experiences.
• Interpersonal and inter-organizational relationships are viewed as the media through which firms can gain access to a variety of resources to gain competitive advantage.

Demerits of the Network Theory

• The theory does not consider the importance of the decision maker and firm-specific attributes in the network development.
• The neglect of inter-personal linkages, the decision maker, and the firm characteristics that emerge when firms take opportunities to penetrate, extend, and integrate in the international market through their networks.