CEO and Founder,
440 Industries
The evolution of international marketing theories stems from an evolution regarding the perception of international trade as an approach to growing profits and developing an organization. Traditionally the approach to international marketing was developed on the grounds of a less internationally developed world. The first academics to address the matter were:
In internationalisation theories, a key distinction is made between cultural distance and psychic distance.
While taking into account the evolution of this subject in this post, we’re going to discuss the most relevant internationalisation theories:
The Uppsala Internationalisation Model is a very relevant and reasonable theory in international marketing. The most relevant observation they made in order to deliver this theory was based around the behaviour of Swedish manufacturing firms, who appeared to begin their operations abroad in markets that were geographically close and only penetrated gradually in more far-flung markets. Also, they noted that mode of entry in new was often export.
This model is based on the experience we can collect from our past performance, it is by exploiting this that we can develop a sustainable international expansion. This is because psychic distance can block or disrupt the flow of information.
According to this model, there are four different stages of entering an international market according to the Uppsala model, each with a higher degree of involvement\commitment.
This model is step-by-step because, in theory, one should move to the next step only when the previous was accomplished successfully. The fundamental idea is that in this model ‘market knowledge’ is by all means equated to other typologies of resources, without which further development is not possible. Market commitment will be carried out in small sequential steps. However, there are exceptions.
There are however some criticisms to this model, as:
The principle followed by this model is that a firm will tend to expand until the cost of organising an extra transaction within the firm will become equal to the cost of carrying out the same transaction by means of exchange in the open market.
In other words, the goal of an organisation is to minimize the cost of exchanging resources in the environment (e.g. negotiation, transport) and the cost of managing them inside the organisation (e.g employee time).
Sources of Transaction cost is for instance:
The costs, therefore, arise from protecting a company towards these risks.
Transaction Costs are friction between buyer and seller which is due to opportunistic behaviour, defined simply as self-interest. This theory, therefore, states that cost minimization explains structural decisions, as firms ‘internalise’ or integrate vertically to reduce transaction costs. These costs are either:
Ex-ante costs:
Ex post costs:
So in a nutshell:
If the transaction costs through externalisation (importer or agent) are higher than the control costs through an internal hierarchical system, then the firm should seek internationalisation of activities, through wholly-owned subsidiaries.
Limitations
In this theory, the human nature is oversimplified by being called opportunistic, as now business is much more oriented towards a non-zero-sum game. Also, SME need to base much of their internationalisation strategy on creating the premises for cooperation with a variety of intermediaries, so their perspective is not to minimize cost in transactions as much as to prevent unfruitful investments. This latter issue is addressed with the next theory.
Business networks are a way of handling activity interdependence between several business actors. In a market model, the relationships between different actors are regulated through market price, in a network instead interaction is mediated through relationships. These relationships are flexible and may alter according to rapid changes in the environment, as the glue keeping relationships together are personal ties.
The strength of networks is given by the fact that actors are motivated to engage in the interaction, need to invest time and effort to create a relationship. This relationship will be developed domestically, because of the need to create ties which may be grounded on commonalities and shared business circumstances. However, according to the network model, the relationship that a firm has in a domestic network can be used as bridges to other networks in other countries. This will increase the pace of internationalisation, as it will provide to the company a preferential set of contacts to reach its expansion objectives.
Born Global is what you call a firm that since its birth, globalises very rapidly without any precedent long-term internationalisation period. A born global is defined as a firm that from its inception pursues a vision of becoming global and globalises rapidly without any preceding preparation stage.
Initially, the first definition of born globals (1976) is simply that these companies internationalise quickly. Later though the element of competitive advantage was added to indicate that fast growth was a point of strength for the company, leading to:
But these are more consequences of a mindset, but what are the internal motivations? Usually, this is what actually ties into the concepts of entrepreneurship.
In this post we’ve explored the theoretical framework that explains the behaviour of firms when growing in international markets. These theories in fact allows us to understand the particular challenges that companies may need to address in terms of dealing with different cultures, but at the same time they help managers build onto the assets that their organisations have developed to have better chances of success.
In general these theories, were designed around the model of a manufacturing firm, but they have shown to respond well to the test of time, as they are still applicable in today’s global business environment.
I am an Anglo-Italian business lecturer and consultant based in Florence, Italy. In 2017 I started 440 Industries, an education and training company focused on fashion, music, and technology. Our mission is to help students, entrepreneurs and managers in overcoming the challenges of starting, developing and scaling their business in the creative industries. When there's a will, there's a way!
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