Internationalization Theory

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Frame of Reference

In this chapter we will describe the theoretical basis of the thesis study. First we will discuss the previous research in family firm internationalization. Secondly, we will explain the different internationalization theories in general and identify the critical elements which are required in order to perform successful internationalization. Finally, we will discuss the special features and characteristics of family firms. These internationalization elements and family firm characteristics will be analyzed and related to each other in the next chapter. Readers who are familiar with internationalization theories and family business characteristics may skip or skim through these paragraphs and turn to Chapter 3 directly.

Previous Research

As stated before, the internationalization of family firms is an underdeveloped area of research. A vast number of studies have focused on the typical issues for family firms such as succession, family relations and estate planning, but the internationalization of these firms is not so much researched (Denison, Lief & Ward, 1999; Kellermans, Eddleston, Barnett & Pearson, 2008). There have been a couple of studies in the past which have empirically researched the impact of some specific features of family businesses on their internationalization process. As we have explained in the problem statement in Chapter 1.2, we believe that there are certain shortcomings to these studies. Nevertheless, we will of course use the previous research in our theoretical analysis as well.
A couple of studies have found a direct relationship between the CEO’s characteristics and the internationalization of family businesses (Davis & Harveston, 2000; Mason, 2008; Olivares‐Mesa & Cabrera‐Suárez, 2006; Casillas & Acedo, 2005). Davis and Harveston (2000) argue that an ageing owner/CEO tends to become more risk averse and conservative. An old owner may not want to take risky decisions anymore, such as internationalizing the business, because this might threaten their own and their family’s economic security. On the other hand it is found that older owners/CEO’s show a higher inclination to internationalize the business, because older owners/CEO’s have most likely more international (business) experience than younger executives (Mason, 2008) Olivares‐ Mesa & Cabrera‐Suárez, 2006).
In addition to the age of the owner/CEO, many studies have found a positive relationship between the owner/CEO his education and internationalization; owners/CEO’s with a higher formal education are more likely to implement change (Cavusgil & Naor, 1987; Simpson & Kujawa, 1974 cited in Davis & Harveston, 2000; Casillas & Acedo, 2005).
Fernández and Nieto (2005) found a negative relationship between family ownership and international involvement. The reason for this negative relationship is the difficulty that family firms face in accessing the essential, external financial and human resources to build competitive advantages internationally (Fernández & Nieto, 2005; Gallo & Garcia‐Pont, 1996; Gallo & Sveen, 1991; Graves & Thomas, 2008), due to the nature of family businesses to ‘protect’ the firm from outsiders. Olivares‐Mesa and Cabrera‐Suárez (2006) stated that this ‘protective’, risk‐averse behavior of the owning families exists because of the concentration of the family wealth in the business. It is found that especially financial resources are required to fund international activities (Graves & Thomas, 2008). In line with this postulation, Olivares‐Mesa and Cabrera‐Suárez (2006) argued that especially smaller family firms are characterized by resource scarcity.
The same study of Fernández and Nieto (2005) shows that external owners help the family firm to complete its array of resources (Fernández & Nieto, 2005). These businesses professionalize their management because of the need to systematize and account to the third party (Fernández & Nieto, 2005). Empirical research has confirmed that the combination of a more professional management and the access to more (financial) resources, due to an alliance with a third party, leads to a more internationally involved business (Fernández & Nieto, 2005).
This view is confirmed by Nordqvist and Naldi, who stated that an open governance structure (external and non‐family owners, board members, CEO) and with large top management teams facilitates internationalization within family firms. More specifically, they distinguished the influence of the governance structure on the scale (the percentage share of a firm its inward and outward international activities) and scope (the number of countries to which a firm is exporting) of internationalization (Nordqvist & Naldi). According to them external ownership promotes both the scale and scope of internationalization, the existence of external board members facilitates only the scale, whereas an external CEO and large top management teams facilitate just the scope of internationalization (Nordqvist & Naldi).
Beside the possibility to have another firm with a stake company, empirical research by Olivares‐ Mesa and Cabrera‐Suárez (2006) shows that partnerships with international firms enhance internationalization as well. The explanation given by Olivares‐Mesa and Cabrera‐Suárez (2006) is that those network ties provide the family business with information about foreign clients and markets, through which these firms may enjoy a ‘learning advantage’ and find it easier to go abroad than firms without international partners.
A study by Gallo and Garcia‐Pont (1996) has discovered that in family businesses (1) a lack of international cultural awareness or experience, (2) a lack of support by the highest governing body of the company (the owners) and (3) the resistance to internationalize the business due to the strong connection with the local market are important reasons for family businesses not to internationalize. This demonstrates the important influence of culture on the decision to internationalize. Regarding the lack of support by the highest governing body of family firms it is argued that an inadequate level of technology, such as the use of Internet, within family businesses is an important cause of this negative perception towards internationalization (Gallo & Garcia‐Pont, 1996; Davis & Harveston, 2000).
Succession is another factor unique to family businesses which has empirically demonstrated relations to internationalization (Fernández and Nieto, 2005; Graves & Thomas, 2008). Fernández and Nieto (2005) found that subsequent generations show higher export propensity and intensity than first‐generation family members. The reason for this can be find in the acquired abilities and knowledge of the second and subsequent generations and the impatience of those generations to demonstrate their capabilities by looking for strategic changes, such as internationalization (Fernández and Nieto, 2005). In other words, a successful succession can give a new push to the firm in terms of new strategies and resources. However, Graves and Thomas (2008) state that the commitment to internationalization always depend on the vision and qualities of the successor.
Finally, the critical importance of a long‐term commitment within family firms has found to have a positive influence on the internationalization process within these businesses (Graves & Thomas, 2008). If family businesses face poor short‐term results from their international activities, they will not directly react with discontinuing those activities due to their longer‐term view on market development and business growth (Graves & Thomas, 2008).

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Internationalization Theory

The existing research in internationalization takes different view‐points to the internationalization process. Consequently, there is a vast variety in definitions about the internationalization process. Therefore, we will first explain the definitions we found in theory about internationalization. In order to perform an unbiased research in family firm internationalization, we must embrace all possible definitions and approaches as feasible. After the definitions we will proceed with the explanation of the different process models and theories and entry modes for internationalization. The same unbiased research principle goes for these sections. For an extensive discussion of the criticism and support for the internationalization theory in question, please refer to appendix 1.

Defining Internationalization

Throughout the years academics have tried to grasp the internationalization process in a definition, usually going hand in hand with the point of view which the academic takes on the internationalizing of a firm.

Economic approach

Researchers supporting this approach found that firms invest abroad when they possess firm‐specific advantages with which they will outperform the international competition. There are market inefficiencies, different demands in other markets and differences in economies (such as: labor costs, market size, customer income) which make it profitable to perform internationalization (e.g. Hymer, 1976; Cited in Dicken, 2007; Dunning, 1979).

Stage models

There are many researchers who, under the sequential, evolutionary or stage approach to internationalization claim that internationalization is a sequential process of increasingly more involvement in international operations (Vernon, 1966; Johanson & Vahlne, 1977; Calof & Beamish, 1995; Welch & Luostarines, 1993; Cited in Naldi, 2008) Different authors find different stages, but they all recognize specific, common steps each with specific characteristics. The internationalization process means that the company continuously adapts its strategy, structure, resources and operations to the new or changed international environment (Johanson and Mattson, 1988).

Network approach

The network approach rests upon the assumption that firms rely on certain resources, which can be accessed only through network connections (Johanson & Mattsson, 1988). Anderson et al (1994) define a business network as a set of two or more connected business relationships which together form a collective actor. These networks will then contribute to the internationalization process by providing for example resources, knowledge and contacts (Johanson & Mattsson, 1988).

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Resource­based views

The resource‐based viewpoint in general links a firms’ internal organization with its ability to achieve a sustainable (international) competitive advantage (Barney, 1991). In the context of internationalization, the management must focus on the sustainable and difficult‐to‐copy attributes of a firm, which contribute to competitive advantages in international markets (Ruzzier et al, 2006).
 

Knowledge­based views

Penrose (1995) is one of the academics who take a knowledge‐based view on growth through internationalization. Penrose (1995) finds a firm to be a bundle of physical and human resources whose productivity is regulated by an administrative body. Therefore, internationalization must be the growth of the administrative body through acquisition of new, international, physical and human resources. Many other researchers also acknowledge the importance of learning (e.g. Johanson & Vahlne, 1977).

International New Venture theory

Oviatt and McDougall (1994) define an international new venture as a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. The process of internationalization is therefore not limited by sequential steps or stages and companies can perform comprehensive internationalization with the use of specific resources, such as experienced manager, technological knowhow or financial resources (Naldi, 2008).

Internationalization models

Here the internationalization models will be thoroughly discussed to ensure that there is a broad orientation on the possible internationalization processes and their implications, so that they can be applied to family firm characteristics and situations. For the purpose of convenience, we have classified the theories under specific headings: Economic approaches (Monopolistic advantage theory, Transaction‐Cost theory and Eclectic paradigm), Stage models (IPLC theory and Uppsala model), Network approach, Resource‐based views, Knowledge‐based views and International New Venture theory.

Economic approaches

Around the 1960s, much research has been conducted on the internationalization of MNEs. This resulted in the development of the economic approach, in particular: the monopolistic advantage theory, the transaction cost theory and the eclectic paradigm (Ruzzier et al, 2006). The economic approach to internationalization regards the process as based on the assumption of market imperfection (Naldi, 2008). Hymer (1976; Cited in Dicken, 2007), pioneered in approaching internationalization from an organizational perspective, argued that structural imperfections of the market enable foreign firms to use competitive advantages over local firms. Hymer (1976; Cited in Dicken, 2007) assumed that local firms initially have competitive advantages over foreign firms, like knowledge about the business environment and market demands and better network connections. Therefore foreign firms need to possess some assets which can undo the competitors’ advantages, like better technology, cheaper capital or economies of scale (Dicken, 2007).
Under the transaction‐cost theory firms seek to optimize the flow of goods by creating an internal market within the company, for example through vertical integration, and bringing new operations, formerly carried out by intermediate markets, under the ownership and governance of the firm. The costs of organizing the transaction will thereby be lowered and the firm will create more profit or a more competitive position (Ruzzier, 2006).
Building on these theories, Dunning (1979; 1980) developed the eclectic paradigm, also known as the OLI paradigm. OLI stands for Ownership‐specific, Localization and Internalization. Companies need to possess certain Ownership‐specific advantages (such as types of knowledge, technology, human skills, financial capital and marketing sources) which give them a competitive advantage in foreign markets (likewise to Hymer, 1976; Cited in Dicken, 2007). Secondly, companies need to be able to Internalize existing and new ownership advantages (i.e. creating new products from R&D, licensing technologies or selling products) in order to continuously compete abroad. Finally, the companies’ locations must make it profitable for the firm to exploit their internalized ownership advantages. The host country must for example allow settlement of the firm (Dunning, 1979; Dicken, 2007; Svetlicic et al, 2007; Ruzzier et al, 2007; Naldi, 2008).

1. BACKGROUND 
1.1. INTRODUCTION
1.2. PROBLEM
1.3. PURPOSE
1.4. DELIMITATION
1.5. DEFINITIONS
2. FRAME OF REFERENCE 
2.1. PREVIOUS RESEARCH
2.2. INTERNATIONALIZATION THEORY
2.3. FAMILY FIRM THEORY
3. THEORETICAL ANALYSIS 
3.1. ANALYSIS MODEL
3.2. FACILITATING FEATURES
3.3. CONSTRAINING FEATURES
3.4. UNCERTAIN FEATURES
3.5. ENTRY MODE CHOICES
3.6. THEORETICAL MODEL
4. METHOD 
4.1. RELATIONS TO THE THESIS
4.2. CHOICE OF METHOD
4.3. RESEARCH TECHNIQUES
4.4. SAMPLE
4.5. EMPIRICAL ANALYSIS APPROACH
5. EMPIRICAL ANALYSIS 
5.1. FACILITATING FEATURES
5.2. CONSTRAINING FEATURES
5.3. UNCERTAIN FEATURES
5.4. ENTRY MODES CHOICES
5.5. ADDITIONAL FINDINGS
6. CONCLUSIONS 
7. DISCUSSION 
7.1. THEORETICAL CONTRIBUTIONS
7.2. MANAGERIAL IMPLICATIONS
7.3. LIMITATIONS AND FURTHER RESEARCH
8. REFERENCES
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