Why Businesses Internationalize: Approaches

Introduction

Business entities make the strategic decision to go global, entering international markets, for a number of goal-objectives and reasons. Business internationalization pertains to the expansion of an entity into regional and global markets. Importantly, as Biggs (2013) states, “these different objectives at the time of entry should produce different strategies, performance goals, and even forms of market participation. However, companies often follow a standard market entry and development strategy”. With global markets evolving rapidly, it is quite often that entities struggle in keeping up with regard to set strategies. Accordingly, the international operations of many companies include different country-specific market operations with various objectives (Biggs 2013). A comparative analysis of the approaches utilized in business internationalization provides a good foundational basis of understanding the importance of the organizational process.

The Internationalization of Business 

International business is a term that collectively describes various commercial transactions like transportation, investments, governmental and public, and sales, which occur between two or more nations. While it is notable that private entities engage in international business for profit, governments undertake these actions for both political reasons and profit-making. Internationalization is a critical strategic growth phase of any entity aiming to venture into the global market and be a multinational corporation (Conference on Development and Change and Deshpande, 2010). There are numerous foreign market entry strategies, all which imply varying degrees of both commitment and risk from international enterprise engagements (van Tulder, 2015). Foreign market entry is achievable through a number of approaches ranging from the least risk import and export, to the more risky approaches such as Foreign Direct Investment (FDI) and franchising. 

There are a number of modes through which businesses may internationalize in the contemporary era. For example, an entity may engage in: export and import, transportation and tourism, franchising and licensing, and management contract (as an alternative to FDI). Towards the end the twentieth century, many barriers to international trade were broken encouraging firms to explore global strategies thereby gaining a competitive advantage. However, industries do not benefit from globalization in the same way similarly to nations (Twarowska and Magdalena, 2013). Thus, to ensure successful global market penetration, it is important that managers have a strategy and understand the dynamic nature of prevailing global industries and dynamism of prevailing competition therein (van Tulder, 2015). These aspects inform on, and influence the different choices/approaches of enterprise internationalization. 

Whenever businesses are internationalizing, they usually follow a given process, from the initial entry stage to full market presence. These stages include licensing or indirect exportation; direct export via local distributors; direct foreign-market presence; foreign manufacture, and home manufacture augmented by foreign assembly (Conference on Development and Change and Deshpande, 2010). Therefore, market-entry techniques that entail important and export have the lowest level of risk control while with direct investments, such as acquisitions have the highest risks (Twarowska and Magdalena, 2013). With regard to importing and exporting, it is the most common and first option in the internationalization process. Through direct and/or indirect export, the business is able to further expand to new markets as a means of strategic enterprise development, with the barest exposure to risks.

A number of other approaches are essential to the internationalization process of firms. Another approach often utilized in internationalization of a business is licensing. As a low-risk move, similar to the import and export approach, licensing entails provision of licensee patent rights, copyrights, and trademark rights on services, processes, and products (Biggs, 2013). The licensee is in turn required to produce and market the licensor’s products and services, providing both licensor royalties and fees related to sales volumes. The agreement is most welcome in foreign nations, where public authorities take advantage of technology gains realized (Twarowska and Magdalena, 2013). Joint ventures are quite similar to licensing, with the core different being that the international firm possesses both a management voice/stake and equity position in the decision-making processes. This agreement provides firms with better control of international operations, in addition to enabling access to prevailing local market knowledge (Terpstra and Sarathy, 2001). More so, not only is the franchisee network of relationships availed, but also such firms face less exposure to risk appropriation. 

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Franchising is another avenue, similar to licensing with the exception that franchising entities often tend to be directly involved in both the control and development of desired marketing programs. Biggs informs that franchisees pay both royalties and fees to the franchiser (parent entity) in return for exclusive rights and identification with a trademark. This enables the sale of goods and services. Franchising agreements are long-term with the franchiser providing a broad array of resources and rights critical to enterprise development: managerial systems, equipment, site approval, enterprise support, initial trainings, operational manuals, and site approval (, 2013). “while a licensing agreement involves things such as intellectual property, trade secrets and others, in franchising it is limited to trademarks and operating know-how of the business” (Twarowska and Magdalena, 2013). Franchising has various advantages like low cost and political risk, good selection of partners and associated managerial capabilities, and the capacity for simultaneous expansion in various regional settings. 

Strategic alliances involve a number of cooperative agreements between two or more firms. Principally, focus is usually on formal joint ventures, minority equity participation, and shared research. This avenue is increasingly becoming popular, often because they are usually created for short-term time frames, focus is often on the creation of new technologies and products as opposed to distribution of existing products, and that these alliances are often between firms in highly industrialized nations (Terpstra and Sarathy, 2001). The key focus and objective is to enable greater levels of technology exchange through multi-disciplinary R&D efforts. Lastly, and most risky to business internationalization is the direct investments approach. This approach is the most risky since the firm has 100% ownership and is therefore committed to ensuring positive growth and competitiveness in the foreign markets (Biggs, 2013). It is not only risky and also costly, but also time-consuming, thereby not highly recommended for less-established firms. 

Conclusion

A comparative analysis of the approaches utilized in business internationalization provides a good foundational basis of understanding the importance of the organizational process. Different enterprises internationalize for diverse reasons ranging from: improved profit-making, increased sales, both short-and long-term security, increased innovation, enabling exclusivity, and enhancing overall economies of scale advantages enjoyed. There are numerous foreign market entry strategies, all which imply varying degrees of both commitment and risk from international enterprise engagements. A variety of modes of internationalization are available for business entities, ranging from the least risky like direct export and import, to more risky approaches such as FDI – Foreign Direct investment and franchising. Whenever businesses internationalize, focus is on enabling greater market presence utilizing distinct modes of engagement.