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CHAPTER 2 Initiation of internationalization

2.1 Introduction

Internationalization occurs when a firm expands its research and development (R&D), production, selling and other business activities into internarional markets. In many larger firms, internationalization may occur in a relatively continuous fashion, with rhe firm undertaking various internationalizauon stages on various foreign expansion projects simultaneously, in incremental steps, over a pericxl of time. However, for small and medium-sized enterprises (SMEs), internacionalizauon is often a relatively discrete process; chat is, one in which management regards each internationalization venuire as distinct and individual.
In the pre-internationalization stages, SME managers use information ro achieve enough relevant knowledge to initiate internationalization (Freeman, 2002). Figure 2.1 illustrates the different stages in pre-internarionalizarion, and rhe rest of this chapter refers to the stages in this figure.

2.2 Internationalization motives

The fundamental reason for exporting, in most firms, is to make money. Bur, as in most business activities, one factor alone rarely accounts for any given action. Usually a mixture of factors results in firms raking steps in a given direction.
The discussion of internationalization motives can be traced back to rhe work of John H. Dunning, who distinguished between four main motives (Dunning, 1993; Benito^ 2015)：

1. Market-seeking： companies gp abroad to find new customers.
2. Efticiency*seeking: companies go abroad ro lower rhe costs associated with performing economic activities and/or with rhe aim of rationalizing their already existing operations in various locations.
3. Resource-seeking: companies venture abroad to access resources that are not readily available ar home or that can be obtained at a lower cost abroad.
4. Strategic asset-seeking： companies go abroad to obtain strategic assets (tangible or intangible) ,which may be critical to their long-term strategy but that are nor available at home.

Table 2.1 provides an overview of the major internationalization motives. They are differentiated into proactive and reacrive motives. Proactive motives represent stimuli to attempt strategy change, based on che firm's interest in exploiting unique competences (e.g. a special technological knowledge) or market possibilities. Reactive motives indicate that the firm reacts to pressures or threats in its home market or in foreign markers and adjusts passively to them by changing irs activities over rime.
Let us take a closer look at each export motive.

Proactive motives

Profit and growth goals

The desire for short-term profit is especially important for SMEs that are at the stage of an inirial interest in exporring. The desire to grow may also be of parcicular importance in a firm's decision to start exporting.
Increasing profits on a longer term can result from selling more or buying better and/or cheaper. If the company is expanding abroad to sell more, it exploits its existing resources and capabilities to obtain access to larger international markets and increased revenues. In the case of buy ing better and/or cheaper the company does so by accessing rhe comparative advantage of the host country and utilizing the competitive advantages of companies there. That would be the case if the company chooses to reduce operations in the home market and increase operations abroad, for example by placing production in a low-cost country.
Over time, the firm's attitude towards growth will be influenced by the type of feedback received from past efforts. For example, the profitability of exporring may determine management's actinude towards it. Of course, rhe perceived profitability, when phnning to enter international markets, is often quite different from the profitability actually attained. Initial profitability may be quite low, particularly in international start*up operations. The gap between perception and reality may be particularly large when the firm has not previously engaged in internarional market acriviries. Despire t horough planning, sudden influences often shift the profit picture substantially. For example, a sudden shift in exchange rates may drastically alter profit forecasts, even though they were based on careful marker evaluation.
The stronger the firm's motivation co grow, the greater will be rhe activities it generates, including search activity for new possibilities, in order to find means of fulfilling growth and profit ambitions.

Managerial urge

Managerial urge is a motivation char reflects rhe desire, drive and enthusiasm of management towards global marketing activities. This enthusiasm can exist simply because managers like to be part of a firm that operates internationally. Further, it can often provide a good reason for international travel. Often, however, the managerial urge to internationalize is simply a reflection of general entrepreneurial morivarion — of a desire for continuous growth and market expansion.
Managerial attitudes play a critical role in determining the exporting activities of the firm. In SMEs, export decisions may be the province of a single decision-maker; in hrge- scale enterprises (LSEs), they might be made by a decision-making unit. Irrespecrive of the number of peopie involved in the export decision-making process, the choice of a foreign market entry strategy is still dependent on the decision-maker's perceptions of foreign markets, expectations concerning these markets and the company's capability of entering them.
The internationalization process may also be encouraged by rhe cultural socialization of the managers. Managers whoeirher were born or have the experience of livingor travelling abroad may be expected to be more inrernarionally minded than other managers. Prior occupation in exporting companies, or membership in trade and professional associations, may also reinforce key decision-makers' perceptions and evaluations of foreign environments.

Technology competence/unique product

A firm may produce goods or services that are nor widely available from international competitors or may have made technological advances in a specialized field. Again, real and perceived advantages should be ditferenriared. Many firms believe that their products or services are unique, even though this may not be rhe case in the inrernation；il market. If products or technology are unique, however, they can certainly provide a sustainable compeurive edge and result in major business success abroad. One issue to consider is how long such a technological or product advantage will continue. Historically, a firm with a comperirive edge could count on being the sole supplier ro foreign markets for many years after entry. In recent times, however, this type of advantage has shrunk dramacically because of competing technologies and a frequent lack of international parent protection.
However, a firm producing superior products is more likely ro receive enquiries from foreign markets because of the perceived competence of its offering^. Several dimensions in the product offering affect the probability that a porencial buyer will be exposed to export stimuli. Furthermore, if a company has devdoped unique competences in its domestic market, the possibilities of spreading unique assets to overseas markets may be very high, because rhe opportunity costs of exploiting these assets in other markers will be very low.

Foreign market opportunities/market information

It is evident that marker opportunities act as stimuli only if the firm has, or is capable of securing, those resources necessary to respond ro the opportunities. As market entry is costly and risky, decision-makers are likely ro consider a rather limited number of foreign marker opportunities in planning their foreign entry. Moreover, such decision-makers are likely to explore first those overseas market opportunities perceived as having some simi- lariry with che opporrunicies in their home marker (Beniro, 2015).
From time to time, certain overseas markers grow spectacularly, providing tempting opportunities for ex pan sion- m in ded firms. The actracuon of the South-east Asian markets is based on their economic successes, while the attraction of the eastern European markets is rooted in their new-found political freedoms and desi re ro develop trade and economic relationships with countries in western Europe, North America and Japan. Other countries that are likely ro increase in marker artraaiveness as key internal chants occur include the People's Republic of China and South Africa.
Specialized ma r ker in g k now led ge or access ro information can distinguish an exporting firm from its competitors. Th is includes knowledge about foreign customers, marketplaces or marker situations that is not widely shared by other firms. Such specialized knowledge may result from particular insights based on a firm's interna non al research, special contacts a firm may have, or simply being in rhe right place ar che right time (e.g. recognizing a good business situarion during a vacation trip). Past marketing success can be a strong motivator for future marketing behaviour. Competence in one or more of the major marketing activities will often be a sufficient catalyse for a company to begin or expand exports.

Economies of scale - learning curve

In this situation, rhe company exploits che resources and capabilities that form rhe basis for its competitive advantage ar home, transferring them abroad and benefiting from economies of scale (Cuervo-Cazurra er ai.9 2015).
Becoming a participant in global marketing activities may enable the firm to increase its output and therefore climb more rapidly on the karning curve. Ever since rhe Boston Consulting Group showed that a doub!ingof ourpur can reduce production costs by up ro 30 per cent, this effect has been very much sought. Increased production for the international market can therefore also help in reducing the cost of production for domestic sales and make rhe firm more competitive domestically as well. This effect often results in seeking marker share as a primary objective of firms (see Exhibits 1.2 and 2.1 as examples of this). Ac an initial level of internationalization this may mean an increased search for export markets; la ter on ir can result in opening foreign subsidiaries and foreign production facilities.

Through exporring, fixed costs arising from administration, facilities, equipment, staff work and R&D can be spread over more units. For some companies a condition for exploiting scale effects on foreign markers to the fullest extent is the possibility of standardizing rhe marketing mix internationally. For others, however, standardized marketing is nor necessary for scale economies.

Tax benefits

Tax benefits can also play a major motivaring role. In the US, a tax mechanism called rhe Foreign Sales Corporation (FSC) has been instituted to assist exporters. It is in conformity with inrernarional agreements and provides firms with certain tax deferrals. Tax benefits allow the firm either to offer its prcxlucts at a lower cost in foreign markets or ro accumulate a higher profit. This may therefore tie in closely with rhe profit motivation.
However, anri-dumping laws enforced by rhe Wo rid Trade Organization (WTO) punish foreign producers for selling their products on local markers at very low prices, in order to protect local producers. Every country that has signed the WTO agreement (and most countries, have signed) must abide by these laws.

Reactive motives

Competitive pressures

A prime form of reactive mortvarion is reaction to competitive pressures. A firm may fear losing domesri< market share ro compering firms th at have benefited from economies of scale gained by global marketing activities. Further, ir may fear losing foreign markets permanently ro domestic competitors that decide ro focus on these markets, knowing that market share is most easily retained by the firm that obtains it initially. Quick entry may result in similarly quick withdrawal once rhe firm recognizes that its preparations have been insufficient. In addition to this, knowing that other firms, particularly competitors, are internarionalizing provides a strong incentive to internarionalize. Competitors are an important external factor stimulating internationalization. Coca-Cola became international much earlier than Pepsi did, but there is no doubt whatever that Coca-Cola's move into overseas markers influenced Pepsi ro move in rhe same direction.

Domestic market: small and saturated

A company may be pushed into expo rung because of a small home market porenrial. For some firms, domestic markets may be unable to sustain sufficient economies of scale and scope, and these companies automatically include export markets as part of their market entry strategy. This type of behaviour is likely for in dust rial products char have few, easily identified customers located throughout rhe world, or for producers of specialized consumer goods with small national segments in many countries.
A saturated domestic market, whether measured in sales volume or market share, has a similar motivating effect. Products marketed domestically by the firm may be in rhe declining stage of the product life cycle. Instead of attempting a push-back of the life cycle process, or in add ition to such an effort, firms may opr to prolong the product life cycle by expanding the marker. In the past, such efforts were often met with success, as customers in many developing countries only gradually reached a level of need and sophistication already attained by customers in industrialized nations. Some developing nations are still often in need of products for which rhe demand in rhe industrialized world is already on rhe decline. In this way, firms can use the international marker to prolong the life cycle of their product (see also Chapter 11 for further discussion).
Many US appliance and car manufacturers initially entered incernariond markets because of whar dhey viewed as near-sanirated domestic markets. US producers of asbestos products found rhe domestic marker legally closed to them but, because some overseas markets had more lenient consumer procection laws, they continued ro produce for overseas markets.
Another perspective on market saturation is also relevant for understanding why firms may expand overseas. Home marker sacuration suggests rhat unused productive resources (such as production and managerial slack) exist within rhe firm. Production slack is a stimulus for securing new marker opportunities, and managerial slack can provide those knowledge resources required for collecting, interpreting and using market information.

Overproduction/excess capacity

If a firm's domestic sales of a product are below expeccanons, the invenror)r can be above desired levek. This situation can be rhe trigger for starting export sales via short-term price curs on inventory products. As soon as the domestic market demand returns to previous levels, global marketing activities are cunailed or even terminated. Firms that have used such a strategy may encounter difficulties when trying to employ it again, because many foreign customers are not interested in temporary or sporadic business relationships. This reaction from abroad may well lead ro a decrease in the importance of this nioriva-cion over time.
In some simarions, however, excess capacity can be a powerful morivarion. It equipment for producuon is not fully utilized, firms may see expansion into rhe international market as an ideal possibility for achieving broader distribution of fixed costs. Alternatively, if all fixed costs are assigned to domestic production, the firm can penerrare international markets with a pricing scheme that focuses mainly on variable costs. Although such a strategy may be useful in the short term, it may result in the offering of products abroad at a lower cost than ar home, which in rurn may stimulate parallel importing. In the long run, fixed costs have to be recovered ro ensure replacement of production equipment. A marker penetration strategy based on variable cost alone is therefore not feasible over the long term.
Sometimes excess production capacity arises because of changing demand in rhe domestic marker. As domestic markets switch to new and substitute products, companies making older product versions develop excess capacity and look for overseas market opportunities.

Unsolicited foreign orders

Many small companies have become aware of opportunities in export markets because their products generated enquiries from overseas. These enquiries can result from advertising in trade journals char have a worldwide circuhrion, through exhibitions and by other means. As a result, a large percentage of exporting firms' initial orders are unsolicited.

Extend sales of seasonal products

Seasonality in demand conditions may be different in rhe domestic marker from other inter national markets. This can act as a persistent stimulus for foreign marker exploration that may result in a more stable demand over the year.
For example, a producer of agricultural machinery in Europe experienced demand from its domestic market primarily in rhe spring months of the year. In an attempt ro achieve a more stable demand over the year, it directed its marker orientation towards the southern hemisphere (e.g. Australia, South Africa), where the summer months coincide with the northern hemisphere, winter in and vice versa.

Proximity to international customers/psychological distance

Physical and psychological proximity to rhe inrernarional marker can often play a major role in the export activities of a firm. For example, German firms established near the Austrian border may nor even perceive their marker activities in Austria as global marketing. Rather, they are simply an extension of domestic activities, without any particular atrenrion being paid to rhe fact that some of rhe products go abroad.
Un like US firms, most European firms auromarically become international marketers simply because rhdr neighbours are so close. As an example, a European firm operating in Belgium needs to go only 100 kilometres ro be in multiple foreign markets. Geographic proximity to foreign markers may not necessarily translate into real or perceived closeness to the foreign customer. Sometimes culrural variables, legal factors and other societal norms make a foreign market that is geographically close seem psychologically distant. For example, research has shown that US firms percdve Canada as psychologically much closer than Mexico. Even the UK, mainly because of the common language, is perceived by many US firms as much doser than Mexico or other Latin American countries, despite the geographic distances. The recent extensive expansion of many Greek firms (especially banks) into rhe Balkans is another example of proximity ro international customers.
In a study of small UK firms' motives for going abroad. West head et aL (2002) found rhe following main reasons for firms scarring to export their prcxlucts/services:

• being contacted by foreign customers who place orders;
• one-off order (no continuous exporting);
• the availability of foreign market information;
• part of the growth objective of the firm；
• export markets are actively rargered by rhe key fo under/owner/manager.

The results of the Westhead et al. (2002) study also showed that the bigger the firm, the more likely it would be to cite proactive stimuli/motives.

The results of Suárez-Ortega and Àlamo-Vera (2005) suggest that rhe main driving forces motivating internationalization are found with in the firm, and therefore they are based on the management's strengths and weaknesses. They conclude that it is nor the external environment that mainly influences the internationalization activities, bur rhe pool of resources and capabilities within the firm that might be appropriately combined to succeed in inrernacional markets. Consequently, the speed and intensity of in cerna cion- alization can be emphasized through programmes aimed at enhancing managers' skills and capabilities. Ako export promotion programmes aiming to get more non-exporters to become interested in ex port i ng s hould emphasize activities that increase managers' awareness of export advantages.

2.3 Triggers of export initiation (change agents)

For inrernanonalization to take place, someone or something within or outside the firm (scxalkd change agents) muse initiate rhe process and carry ir through to implementation (see Table 2.2). These are known as internationalization triggers. One conclusion from rhe research done in this area is that it is rare that an isolated factor will trigger a firm's inter- narionalization process. In most cases it is a combination of factors that initiates rhe internationalization process (Rundh, 2007).

Internal triggers

Perceptive management

Perceptive managers gain early awareness of developing opponunines in overseas markets. They make it their business to become knowledgeable about these markets, and maintain a sense of open-mindedness about where and when their companies should expand overseas. Perceptive managers include many cosmopolitans in rheir ranks.
A trigger factor is frequently foreign travel, du ring which new business opportunities are discovered or information is received that leads management ro believe char such opportunities exist. Managers who have lived abroad, have learned foreign languages or are particularly interested in foreign cultures are likely, sooner rather than later, to investigate whether global marketing opport unities would be appropriate for their firm.
Often managers enter a firm having already had some global marketing experience in previous jobs and try to use this experience ro further rhe business activities of their new firm. In developing their goals in the new job, managers frequently consider an entirely new set of options, one of which may be global marketing activities.

Specific internal event

A significant event can be another major change agent. A new employee who firmly believes that the firm should undertake global marketing may find ways ro morivare management. Overproduction or a reduction in domestic market size can serve as such an event, as can rhe receipt of new information about current product uses. For instance, a company's research activity may develop a by-product suitable for sale overseas, as happened with a food-p rocessi ng firm that discovered a low-cost protein ideal for helping ro relieve food shortages in some parts of Africa.
Research has shown char in SMEs the initial decision to export is usually made by the chief executive, with substantial input provided by rhe marked ng department. The carrying out of rhe decision — that is, the initiation of actual global marketing activities and the implementation of these activities — is then primarily the responsibility of rhe marketing personnel. Only in rhe final decision stage of evaluating global marketing activities does the major emphasis rest again with rhe chief execurive of the firm. In order ro influence a firm internally, it therefore appears that the major emphasis should be placed first on convincing rhe chkf executive to enter rhe international marketplace and then on convincing the marketing department that global marketing is an important acriviry. Conversely, rhe marketing department is a good place ro be if one wants to become active in mrernational business.
In a recent study of internationalization behaviour in Finnish SMEs, Forsman et al. (2002) found thar rhe three most important triggers for starring up operations internarion- ally were as follows:

1. management's interest in internationalization;
2. foreign enquiries about rhe company's produers/services;
3. inadequate demand in rhe home market.

In this study it is interesting co note that companies do not regard contacts from chambers of commerce or other support organizations as imporrant for getting their international activities going. However, chambers of commerce are often used for obtaining further information about a foreign country after an inirial trigger has led to the considera- cion of going inter national.

Inward/outward internationalization

Internationalization has cradirionally been regarded as an oun\rard flow and most internationalization models have not dealt explicitly with hew earlier inward activities, and thereby gained knowledge, can influence later outward activities. A natural way of inrer- nationalizing would be first to get involved in inward activities (imports) and thereafter in ounvard activities (exports). Relationships and knowledge gathered from import activities could thus be used when the firm engages in export activities (Welch et al.2001).
Welch and Loustarinen (1993) claim that inward intemationalization (importing) may precede and influence outward internationalization (international market entry and marketing activities) — see Figure 2.2.
A direct relationship exists between inward and outward inrernationalizarion in the way that effective inward activities can determine rhe success of oururard activiries, especially in the early stages of inter nationalization. The inward i nre ma don al i za non may be initiated by one of the following:

• the buyer: acci ve inter national search of different foreign sources (buyer initiative reverse marketing)；
• the seller: initiation by rhe foreign supplier (traditional seller perspective).

During the pro cess from inward to ou^ard internationalization, the buyer's role (in country A) shifts to that of seller, both to domestic customers (in countiy A) and ro foreign customers. Through interaction with the foreign supplier, the buyer (importer) obtains access to rhe nerwork of rhe supplier, so that at some later rime there may be an outward export to members of this network.

Inward international operations thus usually cover a variety of different forms used to strengthen a firm's resources. Of course, inward flows imply importing products needed for the pnxlucrion process, such as raw materials and machinery. But inward operations can also include finances and technology through different opera cion a) forms, such as franchising, direct investments and alliances (Forsman et al., 2002). In some cases inward foreign licensing may be followed by outward technology sales. According to Fletcher (2001) and Freeman (2002), inward and outward activities and the links berween them can develop in different ways. The links are most tangible in counter-trade arrangements (where the focal firm initiates exporting to the same market from which importing takes place), but they can also be found in the networks of relationships berween subunits within a multinational enterprise and in sera regie alliances.

External triggers

Market demand

Growth in international markets also causes the dem and for rhe products of some companies to grow, pushing rhe makers of these products into internationalization. Many phar- maceiideal companies entered international markets when growth in the international demand for their products first began. The US-based company Squibb entered rhe Turkish market before it was hrge enough to be profitable, bur rhe marker was growing rapidly, which encouraged Squibb to inrernarionalize further.

Network partners

Access to externa! network partners may encourage rhe company to use this as a key source of knowledge in triggering rhe i nterna nona I iza tion process. For example, the company network partners can provide access co international sales through their distribution and sales network s abroad (Vissak et al., 2008).

Competing firms

Information that an execurive in a compering firm considers certain internacional markets to be valuable and worthwhile developing captures the actenrion of management. Such statements nor only have source credibility bur are also viewed with a certain amount of fear because the compeuror may evenmally infrin辟 on the firm's business.

Trade associations and other outside experts

Formal and informal meetings among managers from different firms ar trade association meetings, conventions or business round tables often serve as a major change agent. It has even been suggested char the decision to export may be made by small firms on rhe basis of rhe collective experience of the group of firms to which they belong.
Other outside experts also encourage inrernationalizarion, induding export agents, governments, chambers of commerce and banks:

• Export agents ；is well as export trading companies and export management firms generally qualify as experts in global marketing. They are already dealing inrernacionally with other products, have overseas contacts and are set up to handle other exportable products. Many of these trade intermediaries approach prospective exporters directly if they think that their products have potential markets overseas.
• Governments. In nearly all countries, governments try to stimulate international business through providing global mark eting ex perrise (export assistance programmes). For example, government stimulation measures can have a positive influence nor only in terms of any direct financial efteas chat they may have, but also in relation to rhe provision of information.
• Chambers of commerce and similar export prcxluction organizations are interested in stimulating international business, both exports and imports. These organizations seek to motivate individual companies to 欧t involved in global marketing and provide incentives for them to do so. These incentives include putting the prospective exporter or importer in touch with overseas business, providing overseas market information, and referring rhe prospective exporter or importer to financial insrirurions capable of financing global marketing activity.
• Banks and other financial institutions ore often instrumental in gening companies to internationalize. They alerr their domestic clients to international opportunities and help them ro capitalize on these opportunines. Of course, they look forward to their services being used more extensively as domestic clients expand internationally.

Financing

Financial resources are required to fund international activities, such as exhibiting” inrer- narional trade fairs, and co bring about the changes required within rhe firm for inrerna- tionalizarion, such as the development of its capabilities (particularly the firm's production, managerial and marketing capabilities). The financial resources available to the company may be influenced by several factors, including rhe firm's willingness to borrow funds from financial institutions.
Government grants (for R&D purposes, in order ro sell products and services worldwide) can be a useful source of finance (and knowledge) in the early status of internationalization.
However, they are not sufficient to build an mrernationalized business. Unless a firm enjoys a dominant position in the domestic marketplace, it will need to raise the necessary funds through industry grants, debt and/or equity finance. This may mean raking greater risks (Graves and Thomas, 2008).

Information search and translation

Of all resources, information and knowledge are perhaps rhe most crirical factor in the iniriarion of the inrernarionalizarion process in the SME (see ako Figure 2.1).
Because each interna nona 1 opportunity constitutes a potential innovation for rhe SME, its management must acquire appropriate informarion. This is especially important to SMEs that typically lack the resources to internarionalize in rhe manner of LSEs. Consequently, management launches an information search and acquires relevant informarion from a number of sources relevant to rhe intended inrernarionalizarion project, such as internal written reports, government agencies, era de associations, personal contacts or the inter net. In the information rranslation stage, the internarionalization informarion is transformed by managers into knowledge within the firm, k is th rough the informarion search and rranslation into knowledge that management becomes informed on internationalization. At this stage, rhe firm has entered a cycle of continuous search and translation into inrernarionalizarion knowledge. This cycle continues until management is satisfied that it has sufficiently reduced the uncertainty associated with the i nr er nar i ona li zat i on project to ensure a relatively high probability of success. Once sufficient information has been acquired and rransiared into usable knowledge, che firm leaves rhe cycle, becoming internanonalizarion-ready. It is here that the firm proceeds to action, that is, internationalization trial. ‘Action’ refers to behaviours and activities, that management executes based on the knowledge thai it has acquired. At this stage the firm could be said to have an embedded inrernarionalizarion culture, where even the most challenging foreign markets can be overcome, leading to further internationalization and 'sterage' of actual inrernauonaliza- tion knowledge in the heads of rhe managers. This description represents the firm more or less in isolation. However, the network theory recognizes the importance of rhe firm's membership in a constellation of firms and organizations. By interacting within such a consrellarion, che firm derives advantages well beyond whar ir could obtain in isolation.
At the most basic level, knowledge is created by individuals. Individuals acquire explicit knowledge via specific meins and tacit knowledge through "hands on1 experience (experiential learning).
The nature of the pre-inrernationalization process (illustrated in Figure 2.1) will be unique in each firm because of several factors ar rhe organizarion and individual levels within rhe firm (Knight and Liesch, 2002). For example, for SMEs it seems that the managers' personal networks tend to speed up rhe pre-inrernarionalizarion process. These personal networks are used for creating cross-border alliances with suppliers, distributors and other mternationai partners (Freeman et aL9 2006).
Throughouc the process depicted in Figure 2.1, the firm may exit from the pre-inrerna- tionalization process ar any rime, as a result of the barriers hindering internationalization. The manager may decide to 'do nothing', an outcome that implies exiting from pre-internationalization.

2.4 Internationalization barriers/risks

A wide variety of barriers to successful export operations can be identified. Some problems mainly affect the export start; others are encountered in the process of exporting. The incremental character of mternanonalizarion (according to the Uppsala model — see Section 3.2) is largely attributed to a lack of marker information. This lack of market information will strongly influence the manager's perceived psychic distance (see Chap- rer 3) from rhe home country ro the hosr country. Increasing the foreign market knowledge will decrease the psychic distance. However, the distortion of information transmission associated with psychic distance implies the necessity of trust development. This means that rrusr plays a crucial role in overcoming the challenges ro successful international relationship building ro rhe foreign partners (Khojastehpour and Johns, 2015).

Barriers hindering internationalization initiation

Critical factors hindering internationalization initiation include the following (mainly internal) barriers:

• insufficient finances;
• insufficient marker knowledge;
• lack of foreign market connections;
• lack of export commitment;
• lack of capital to finance expansion into foreign markets；
• lack of productive capacity to dedicate to foreign markers；
• lack of foreign channels of distribution;
• management emphasis on developing domestic markets;
• cost escalation due to high export manufacturing, distribution and financing expenditures.

Inadequate information on potential foreign customers, competition and foreign business practices is a key barrier facing active and prospective exporters.Obtaining adequate representarion for overseas distribution and service, ensuring payment, import tariffs and quotas, and difficulnes in communicating with foreign distributors and customers are also major concerns. Serious problems can also arise from production disruptions resulting from a requirement for non-standard export products. This will increase rhe cost of manufacturing and distribution.
In a study of craft micro-enterprises (fewer than ten employees) in the UK and Ireland, Fillis (2002) found that having sufficient business in the domestic market was the major factor in the decision not to export. Other reasons of above-average importance were lack of export inquiries, relating ro rhe reactive approach ro business; complicated exporting procedures; poor levels of exporting assistance; and limited government incentives. Similar results were supported by a study by Westhead el aL (2002), who found rhar for small firms "focus on local market, was the main reason for nor exporting any of their products.

Barriers hindering the further process of internationalization

Critical barriers in the process of biternationiiliziition (sometimes resulting in more costs than benefits) may generally be divided into three groups: general market risks, commercial risks and political risks, all seen from the company perspecrive.

General market risks

General marker risks include the following:

• Companitiue market distancez each additional foreign market creates additional organizational costs, and differences in culture and language will increase rhe amount of information that managers must collect to effectively manage and coordinate across the foreign markets.
• Adaptation to foreign markets: the products and services that companies produce abroad are often the same as at home bin, even, in that case, producing and selling abroad involve higher costs than doing it at home. It requires modifications to rhe production process and marketing mix.
• Competirion from other firms in foreign markets.
• Adapting products and services to new local conditions.
• Difficulties in finding the right discributor in the foreign market.
• Differences in product specifications in foreign markers.
• Complexity of shipping services to overseas buyers.

Commercial risks

The following fall into the commercial risks group：

• exchange rate fluctuations when contracts are made in a foreign currency;
• failure of export customers to pay due to contract dispute, bankruptcy, refusal to accept the product or fraud;
• delays and/or damage in rhe export shipment and distribution process;
• difficulties in obtaining export financing.

Political risks

Among rhe political risks resulting from intervention by home and host country governments are the following;

• foreign government restrictions (think about the Russian-Ukrainian conflia in 2014, which resulted in import restrictions, imposed by the Russian government);
• national export policy (think about the Russian—Ukrainian conflict in 2014, which resulted in EU boycott of certain products exported to Russia);
• foreign exchange controls imposed by host ^)vernments that limit the opportunities for foreign customers to make payment;
• lack of governmental assistance in overcoming export barriers;
• lack of tax incentives for companies that export;
• high value of rhe domestic currency rdarive to those in export markers;
• high foreign tariffs on imported products;
• confusing foreign import regulations and procedures;
• complexity of trade documenrarion;
• enforcement of national legal codes regulating exports;
• civil strife, revolution and wars disrupting foreign markets.

The importance of these risks must nor be overemphasized, and various risk management strategies are open to exporters, including the following：

• Avoid exporting to high-risk markets.
• Diversify overseas maikets and ensure that the firm is nor ovexdependent on any single country.
• Insure risks when possible — government schemes are particularly attractive.
• Structure export business so that the buyer bears most of the risk. For example, price in a hard cu rrency and demand cash in advance.

In Fillis (2002), over one-third of the exporting craft firms indicated that they encountered problems once they entered export markers. The most common problem was connected with rhe choice of a reliable discributor, followed by difficulties in promoting the product and matching competitors' prices.

De-internationalization

The above explained barriers can sometimes be so serious that the internationalization process can go in a different direction from what was expected. The de-internationalization process can be defined as the process whereby the multinational company shifts to a strategic configuration that has a lower international presence (Turner, 2012). Both external and internal factors determine the adoption of a de-internationalization strategy, which is characterized by the transition of various stages that culminates in the reorientation of the company’s strategy, whether through a tactical withdrawal seen as a failure, or a strategic withdrawal seen as an opportunity for growth in other markets.
For example, at one point Carrefour (the world’s second largest retailer) decided to go into many new countries based on selected criteria, mainly market size, geographical proximity and compatibility of operations. Entering so many new countries meant that Carrefour was also confronted with different regulations in the retail markets on the basis of religion, culture and taste. To recover its profitability, around 2005 Carrefour decided to separate from its non-strategic and unprofitable assets, mainly outside Europe (Buigues et al ., 2015).
Researchers have questioned to what extent companies should continue to expand
internationally if this strategy is not always profitable. Empirical studies (Turner, 2012; Buigues et al., 2015) have evidenced an optimum point in terms of internationalization that results in the ‘inverted U-shaped curve’ ( Figure 2.3 ), where – at a company level – there should be a maximum of countries that should be served. Internationalization incurs costs for the expanding company which explains why further internationalization can have negative influence on profitability and why overinternationalized companies may reduce their degree of internationalization.
Figure 2.3 shows that from a certain stage in the firm’s internationalization process (the ‘optimal’ level), the costs of further international expansion outweigh the marginal financial benefits, producing a lower profitability, in terms of return on investment (ROI). The shape of Figure 2.3 has been confirmed by a study of Buigues et al. (2015), which showed that when levels of internationalization were below the ‘optimal’ level, companies generally continued their international expansion. Conversely, when the level of internationalization The inverted U-shaped curve of internationalization was beyond the optimum (measured by profitability metrics, like ROI), a majority of the companies acrually decreased rheir level of internarionalization. From a managerial point of view, this implies that managers should always have a close look ar the balance between rhe costs and benefits of i«rernationalizadon. See also Exhibit 2.4 for a more in-depth view on BT's de-internationalization process.

What can we learn from the BT case?

BT’s de-internationalization was driven by the financial situation, where the high cost of market entry combined with falling prices (driven by excess capacity in rhe tekcommunicarion sector) led ro declining profits throughout the 1990s. Con sequent I the new defensive strategy represented a process of de-inrcrnarionalization as BT recreated from the US and Asian markets f multiple withdrawal' in Figure 2.5). B"Fs new international strategy is based on the European market, where there are interdependencies with rhe core UK business. This means that BT tries co own and control all aspects of rhe delivery mechanism within the European marker.

This BT case demonstrates that the futu re development of rhe global marketing strategy can work in both directions. If the globalization of markets goes well in a company, the interdependence and synergies between markets can be further utilized ro strengthen the global strateg\r (upper-right corner in Figure 25). However, rhe case also shows that divestment in individual locations cannot occur in isolation without damaging the firm's global value proposition. Therefore, BT's de- in cerna non al izat io n ako meant (because of the high dependence of markers) char it had ro make multiple market withdrawals.
It we calk about SMEs (not rhe case with BT!), there is often a low interdependence between markets, and in that case one talks about a 4mulridomestic, strategy if incerna- tionalizarion is increased (lower-right corner in Figure 2.5) and individual withdrawal if inter nationalization is decreased (lower-left corner in Figure 2.5).

2.5 Summary

This chapter has provided an overview of che pre- in cerna ri on al i zac io n process. The chapter opened with the major motives for firms to internationalize. These were differenciaced into proactive and reactive motives. Proactive motives represent internal stimuli ro attempt strategy change, based on che firm's interest in exploiting unique competences or marker possibilities. Reactive motives indicate that the firm reacts to pressures or threats in its home market or in foreign markers and adjusts passively to them.
For internarionalizacion to take place, someone or something ("triggers') inside or outside the firm must initiate it and carry it through- To succeed in global marketing rhe firm has co overcome export barriers. Some barriers mainly affect che export initiation and others are encountered in the process of exporting.

Questions for discussion

1.Export motives can be classical as reactive or proactive. Give examples of each group of export motives. How would you prioritize these motives? Can you think of motives other than those mentioned in the chapter? What are they?
2.What is meant by ‘change agents’ in global marketing? Give examples of different types of change agent.
3.Discuss the most critical barriers to the process of exporting.
4.What were the most important change agents in the internationalization of Haier
(Exhibit 2.3)?
5.What were the most important export motives in Japanese firms (Exhibit 2.2)?

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