CONTEXTS OF FIRM INTERNATIONALIZATION:
THE IMPORTANCE OF BUSINESS AND OWNERSHIP
INTEGRATION

 

Jesper Strandskov*
Poul Houman Andersen**
The Aarhus School of Business, Denmark

 

Abstract:

The article develops a conceptual framework for analyzing alternative modes of internationalization open to the single strategic business unit (SBU). The framework suggests that increased resource access through ownership and/or business system links increase the pace and scope of internationalization, while restricting the latitude of strategic choices. Access to resources and skill pools developed by other organizational entities enables the SBU to accelerate the internationalization process, and offers other potential routes to follow other than the one that conventional models predict, i.e., customer-driven instead of supplier-driven internationalization. On the other hand, the existence of a trade-off between the potentials of tapping critical resources and the limitations of the focal SBU to make decisions regarding its own development, adds to the complexity of aspects to the internationalization process. A proposed typology presents four different "internationalization contexts" and several propositions are developed.

 

Keywords: Internationalization of Strategic Business Units; Resource Access and Control.

*Correspondent author: Professor, dr.merc., Department of International Business, The Aarhus School of Business, Fuglesangs Alle 4, 8210 Aarhus V, Denmark. Tel: +45 89486348. Fax: +45 89486125. E-mail: jsv@hha.dk.

** Associate Professor, Ph.D, Department of International Business.



Contexts of Firm Internationalization:
The Importance of Business and Ownership Integration

INTRODUCTION

The increasing amount of research on the internationalization of firms, industries, cooperative ventures etc., as well as cross-cultural studies that has evolved within the last 15 - 20 years has made it impossible to survey and cover the field. Within the specific field of firm internationalization, some have highlighted the concept of internationalization within the context of smaller firms based on process and behavioural approaches (see for example Andersen, 1993; Melin, 1992). Others have offered economic theories of monopolistic competition, location and transaction costs etc. (Hennart, 1982; Dunning, 1992), while only a few have devoted resource-based explanations of internationalization (Madhok 1997; Andersen and Kheam, 1996).

The current status of the theory of firm internationalization seems to suggest that there is a great need for further studying the theoretical dimensions as well as explanatory power and operationalization of the traditional process models (Forsgren, 1989; Andersen, 1993, Strandskov, 1993). In particular, there is a strong need for understanding the embeddedness of firm internationalization and the explicit contexts that unfold within the internationalization process. That is, how the internationalization process is related to its surrounding contexts in a broader sense (Melin, 1992: 114), and how firm internationalization is tied into the interface between the external environment and the internal organizational characteristics (Zou and Czinkota, 1996).

This article addresses the latter aspects of internationalization and focuses more specifically on the relationship between the firm’s strategic choices of internationalization and the institutional and business contexts of the process, that is, the importance of the ownership and business integration. We will link these contextual contingencies with the pace and scope of internationalization. The scope of internationalization concerns the number of markets and segments covered and the distance between the home markets and the foreign markets covered, both in geographical and in cultural terms (Kutschker and Bäurle, 1997). The pace of internationalization concerns the frequency at which markets are entered and penetrated (Andersen, 1997). The pace of internationalization may range from a gradually deepening involvement to a rapid or even instantaneous establishment of activities in foreign markets (Calof and Beamish, 1995; Madsen and Servais, 1997).

In the following discussion, the unit of analysis is the single business unit (SBU) and/or the single business firm operating within a dominating business. In most of the literature on firm internationalization, it seems to be rather unspecified whether it is the product, the product-market area, or the firm as such which is the unit of analysis. A single business can be defined as an organizational unit that competes in well-defined markets and serves distinct sets of customers with its families of products and services. A single business unit is strategically autonomous to the extent that the management has control over the key factors that determine its success in several markets (Day, 1990).

The paper has three sections. In the first section, we will argue that the pace and scope of firm internationalization depends largely on the access to resources, and the locus of resource control and allocation. Resource development and control can emanate from either of the two different sources: the ownership or the business system of the firm. The second section develops a conceptual framework assessing the diversity of internationalization in contexts of different ownership and business integrated systems. We develop a typology that enables us to identify four different contexts of internationalization and evaluate how the existing literature within the area fits into the conceptual framework. Propositions for each context of SBU internationalization are developed. The concluding section suggests some key themes for future research within the field.

INTERNATIONALIZATION: A RESOURCE ACCESSIBILITY AND CONTROL PERSPECTIVE

Contexts define the single business unit’s strategic issues, challenges and its alternative options, and ways of approaching and acting in the international environment. For some SBUs, the overall corporate strategy may be a part of the quasi-external environment, whereas others may not be embedded in an overarching strategy planning system. Environmental contexts may be created by the firm through manipulating the task environment, or may be taken as externally given (Pfeffer and Salancik, 1978). Also, the contexts may be of different types and nature. Although difficult to separate vis-a-vis each other most often social, political, institutional and/or business related contexts have great importance for the pace and development of firm internationalization.

Moreover, inner as well as outer contexts may delimit the strategic choices of the SBU. The outer context is related to the external environment of the firm and is often beyond the control of the firm. The trend toward a growing number of international mergers and acquisitions implies that more and more SBUs or firms will continue to unfold their internationalization process within a new ownership structure, and thereby become more dependent on resources, capabilities and financial support from the parent company. In turn, this alters the inner context of the internationalization, by changing the traditional perception of the firm as an independent entity following its own goals and missions.

In general, because the international firm acts in a number of different social and political contexts the internationalization process is embedded into the institutional structure of business systems in different countries and national cultures. This outer social and political context of embeddedness has, in particular, important consequences for adapting products, foreign marketing methods etc., and for managing and controlling foreign operations. The inner context, however, is rather a negotiated political and social environment in terms of attracting investments, resource allocation etc. (Cyert and March, 1963).

The internationalization processes are also linked to the business context per se or the industrial setting to which it belongs (Nordström, 1991). The internationalization processes of raw material producers, manufacturing firms, service companies, trading firms and distributors, may differ because of the nature of their activity, their functional location and integration within the business system as such, and the overall division of labour within their industry. For example, it has been suggested that the entry mode establishing a chain is different for service companies than manufacturers (Sharma and Johanson, 1987).

Besides the characteristics of the functional activity, the industrial context of the product and/or service also has a significant importance for the process of internationalization. Some industries of today are international and characterised by global competition where rivals within one sector compete against one another on a worldwide basis (Ohmae, 1989). Industries may be strongly internationalized because of strong cross border relationships in the production and marketing systems. For example, in highly internationalized market environments, it has been pointed out that the internationalization process of the firm is relatively faster, less gradual, and more individual (Johanson and Mattsson, 1988).

Based on the discussion of the importance of the context of internationalization, two basic arguments will be put forward. First, we will argue that the pace and scope of the SBU internationalization primarily depend on the access to resources, because resource accessibility enables firms to conceive of and implement value-creating strategies which in turn determines the sources of the competitive advantage of the firm.

Second, we will argue that firm internationalization is influenced by the locus of resource control and allocation, that is, who controls and allocates resources. On a more general level, Penrose points out that two groups of generic resources matter in business expansion - inherited resources, and those the firm must obtain from the market in order to carry out its business development (Penrose, 1959: 85). International expansion is no exception.

Although many of the studies of firm internationalization have no specific focus on the importance of unique assets or firm-specific capabilities and skills in line with the resource-based theory, research from different countries have paid attention to a great number of structural and ownership-based determinants. In particular, the importance of product characteristics (Cavusgil and Naor, 1987), technology (Cooper and Kleinschmidt, 1985; Schegelmilch, 1988), marketing capabilities (Johnston and Czinkota, 1982), firm size (Bonaccorsil, 1992; Calof, 1993; Culpan, 1989) etc., have been studied. Also, empirical studies have brought evidence that top management attitudes and skills are crucial determinants in affecting international involvement (Aaby and Slater, 1989; McGaughey et al., 1996). In particular, market and experimental (tacit) knowledge, market resources and incremental learning etc., have received attention in explaining a firm’s international behaviour (Johanson and Vahlne, 1977). These drivers of internationalization may be seen as nothing other than ownership advantages and/or disadvantages.

However, both the amount and the nature of resources shape the internationalization processes though not all kinds of resources are equally important for foreign market expansion. Thus, resources may possess different characteristics, making them of special value to their owners. For example, resources may be valuable because they are scarce (Ricardian rent), imperfectly imitable, and non-substitutable as predicted in the resource-based theory (Barney, 1986; Peteraf, 1993). Or the resources may be critical because others control them as emphasized in the resource-dependent theory (Pfeffer and Salancik, 1978).

On the one hand, the resource-based theory argues that a firm that possesses and develops resources and capabilities internally will become more or less unique compared with other firms (Barney, 1986; Hall, 1993). Unique ways of combining and applying innovation resources (market development capabilities), human resources, brand label capital or functional experience (production, marketing, sales etc.) are examples of such capabilities (Mahoney, 1997). In particular, the non-tradeable resources and capabilities (perfect immobile) which develop and accumulate within the firm are of central concern to the resource-based theory (Dierickx and Cool, 1989). Such capabilities in turn are normally seen as production bundles of routines of a highly tacit and complex nature and therefore tend to defy imitation.

On the other hand, the firm’s target environment or market context consists most often of long-lasting relationships with certain customers, suppliers and other specific counterparts, rather than with an anonymous market (Axelsson and Easton, 1991). Therefore, it may be argued that internally developed and controlled resources of the firm cannot really be analyzed independent of the specific relationships it is a part of. Moreover, business relationships may give access to critical resources/capabilities outside the boundary of the firm, for example, by tapping resources from its major suppliers and/or customers, which may be more important than resources developed internally (Håkansson and Snekota, 1995).

In general, resource control can emanate from two totally different sources, namely, hierarchical means and business network positions. The hierarchical aspect of control is linked to the ownership system and deals with questions about the formal ways of supervising a SBU/ single firm. Control through hierarchical means is ultimately based on the legitimate right to control, for example, the managerial authority vested in the formal evaluation systems and the organizational structure, and is most often one-sided (unilateral).

Another source emanates from the control over actual resources in business relations or networks. Control in this sense consists of the influence that an organizational unit can exercise on other units as a result of its control over resources on which the other units are dependent. This control is usually connected to the ability to obtain critical resources from the environment and is reciprocal in nature (Pfeffer and Salancik, 1978). This makes the resource development process a never-ending interaction between specific capabilities of the business partners. No choice can be made unilaterally, since the business counterpart must be continuously motivated to engage in the relationship.

Our two basic arguments are outlined in Figure 1. Although we recognize that firm contextual variables like, for example, the history of the SBU, structural and behavioural characteristic etc., also influence the dynamics and scope of internationalization, the following discussion is limited to the ownership and business based resources as internationalization drivers.

Ownership-Based Resources as Internationalization Drivers

The ownership system in which the SBU/single firm is embedded is likely to signal important differences in both resource accessibility and control. Studies of corporate governance show that different ownership structures influence organizational behaviour with regard to management incentives (Jensen and Meckling, 1976); goal formulation (Shephard, 1989), and risk and investment behaviour (Fama, 1980). The existence of such an ownership-behaviour link suggests that internationalization of the SBU is also influenced by the ownership structure of which it is a part.

The importance of ownership integration as one of the primary determinants of firm behaviour and governance is addressed by transaction cost theory, and agent theory (Shleifer and Vishny, 1996). In general, ownership integration provides the corporate owner (e.g., the parent firm) with incentives to take an active interest in the firm or the SBU and monitor its development and internationalization. According to transaction cost economics, the suppliers of equity capital own the firm (i.e., they process the residual rights of control) as a way to safeguard transaction specific investment through oversight and involvement.

Within the framework of the transaction cost theory, the central question is whether the control is most effectively exercised by the anonymous mechanisms of the market, or by the direct influences of the parent company (e.g., hierarchical means). Also, a hybrid governance structure may offer an alternative. However, it is often argued that integrated ownership structures may reduce the costs of coordinating transactions with a high degree of asset specificity (Teece, 1986; Hennart, 1986), as well as protecting ownership advantages of the firm (Dunning, 1988).

Within the agent theory, the position of the owner-integrated business unit is also taken into consideration. It is argued that two kinds of efficiency are often in conflict: Local managers may by better informed about the nature of their business (for example business unit managers, subsidiary managers etc.) and about their own abilities than either outside capital interests or inside corporate interests (e.g., HQ-managers). Under specific conditions, this makes it more incentive efficient for local management to take over the ownership rights and control of the firm, however, it also gives rise to agency problems (Lee and Kwok, 1988; Roth and O’Donnell, 1996).

However, it is not only the ownership system per se but also the identity of the owner (or the parent company) that affects the different priorities given to economic and business goals, missions etc., of the SBU. For example, foreign-owned companies (i.e. foreign subsidiaries in the MNC literature) may be restricted in their business and internationalization plans compared with owner-independent firms with no parent relationships. Cooperative firms, owned by the suppliers of raw materials, are more likely to oppose investment plans that stretch beyond their ownership period, because cooperative members cannot resell their shares. The liquidity of ownership will affect the time preferences of the cooperative owners and thereby corporate investment behaviour (Fama, 1980).

Even an ownership-risk behaviour link may exist. According to financial theory, corporate owners, as for example, MNCs with well-diversified portfolios (i.e. many unrelated subsidiaries) will not be averse to firm-specific risk (Brealey et al., 1995). The diversification theory may be advanced to posit that the MNC has a lower level of systematic risk relative to a similar domestic firm, and thus would face lower bankruptcy costs as well as higher capacity to carry debt (Reeb, Kwok and Baek, 1998). On the other hand, owners investing a significant share of their capital in a single firm are more likely to advocate low-risk firm strategies. This in turn may have an influence on the internationalization of the subsidiaries or the SBUs.

Business System Resources as Internationalisation Drivers

Business units generally find themselves in an environment consisting of other organizations with, which they must engage in exchange in order to acquire critical resources. Several strands of research have contributed to the understanding of how dependence on externally controlled resources affects the single organizational unit. Thus, patterns of resource exchange and development in inter-firm networks are debated in numerous scientific communities (Grandiori and Soda, 1995). For instance, industrial economists have discussed resource economies emending from external economies of scale and scope and quasi-integration (Blois, 1972). Also, contributions from relationship marketing (Håkansson and Snekota, 1995; Axelsson and Easton, 1991), resource-dependence theory (Pfeffer and Salancik, 1978) and scholars of industrial districts (e.g., Brusco, 1982; Dei Ottati, 1994) have provided insights on the access, development and control aspects of resources within inter-organizational contexts.

Besides internally controlled resources, research has repeatedly shown that business units often marshal complementary but externally controlled resources in favour of their internationalization (Johanson and Mattsson, 1988; Blankenburg and Johanson, 1992; Christensen and Lindmark, 1991). Especially for small and medium-sized firms, access to complementary resources are crucial (Andersen, 1995). A fine-grained division of labour in the business system allows the small and resource-weak firm to specialize and exploit its resources more fruitfully. For this type of firm, the international expansion processes are, therefore, not only a task of directing and coordinating internal resources; to a large extent, it is also a task of finding, committing, directing, and coordinating external resources in favour of activities.

Despite the obvious advantages of teaming up with other business units, mobilization of external resources in favour of a business unit’s internationalization also has serious drawbacks in terms of resource dependency (Pfeffer and Salancik, 1978). Teaming up with external resources-owners usually means stronger interdependency and less autonomy. Hence, the management of dependence on critical external resources becomes a critical issue when business system resources are used as internationalization levers. A negotiated rather than an administrative environment subsume managerial decision-making, where coalitions of resource-stakeholders’ interests matter. Hence, organizations become markets for resource control (Pfeffer and Salancik, 1978).

A SBU or the single firm is less likely to develop foreign market skills and competencies internally when it relies heavily on the resources of external actors. For example, it is common practice to leave the international dimensions of the manufacturers' activity to powerful trading houses, such as the Japanese Sogo Sosha (Yoshino & Lifson, 1986). The resources provided externally reduce the motivation for developing internal foreign market competencies and thereby increases external dependence. Table 1 outlines some distinguishing characteristics of both the ownership and the business system with respect to resource development and accessibility on the one hand and resource allocation and control on the other.

INTERNATIONALIZATION IN DIFFERENT OWNERSHIP AND BUSINESS RELATED SYSTEMS

The contexts of the ownership system and the business system together will have major implications for the dynamics and scope of the internationalization of the SBU. Ownership and business integration is, first of all, a question of the existence of links and relations between one organizational unit vis-a-vis another. The type and importance of the links primarily determine resource accessibility and control of the SBU. Integration has been looked upon as a network of flows: capital flows, product flows and information/knowledge flows (Gupta and Govindajan, 1991). The flows may follow different routes giving different integration results. A business unit can, for instance, be highly integrated in terms of supply and demand of products but much less integrated in terms of knowledge and capital flows. Integration increases with the intensity of the flow of resources as well as with the number of organizational units and people involved in the exchange between the nodes of the network.

We will argue that varying degrees of ownership and business integration describe alternative internationalization situations in terms of managerial restraints, access to resources and output conditions. Moreover, previous research into industrial organization suggests that these dimensions are mutually orthogonal and thus analytically separable (Imai and Itami, 1984; Robertson and Langlois, 1995). Combining these two dimensions generates four different businesses and ownership-related contexts, see Figure 2.

The four cells provide a useful conceptual framework for systematically examining the contingencies of ownership and business system integration on the nature of the internationalization process. In the following section, we will outline and describe these forms. Subsequently we develop a set of propositions implying that these forms may vary in terms of basic structural and processual dimensions of internationalization.

Cell 1: Independent Ownership-based Internationalization

In contexts in which low levels of both ownership and business system integration prevails, the resource accumulation process of the SBU is governed internally as well as the resource flows follow internally developed administrative procedures. According to the growth theories of the firm (Penrose, 1959) the development of the firm is dependent on its own ability to build up resources and skills for product development, internationalization etc., and its ability to attract outside financial (and managerial) resources for realizing its business plans. In particular, businesses and firms operating as independent entities compete for financial resources in the external capital market. Most often they do so by providing a sufficiently high return to induce investors to purchase shares of their equity by having a sufficiently high cash flow (Williamson, 1975). As a consequence, the resource development process is expected to be relatively slow and gradual in nature, typically governed by a series of incremental market investment decisions and a risk-adverse behaviour.

Depending on the amount and nature of the firm-specific advantages, the firm typically starts its business activities in a local market environment and gradually expands its activities to more distant geographical markets. The abilities to develop firm-specific resources and skills, and learning about a specific foreign country, will influence its international market opportunities. Within the context of Cell 1, resource exchanges with other firms take place in anonymous factor and output (product) markets with the price mechanism, and discrete, classical contracts as the major forms of governance structures, that is, traditional exporting.

Whereas the firm in the initial step of exporting may sell through a domestic export house or go directly to foreign distributors, it will gradually gain more experience and perceive less uncertainty regarding export market conditions. Still, low-committed entry modes like exporting through a local distributor or using licensees also tend to be low-control modes. Depending of the nature of the product and/or service the firm offers (the degree of specialization, R&D-intensity, service content etc.) and the transaction conditions (the degree of frequency, resource specificity etc.), the SBU may finally find it desirable to establish its own sales subsidiary. However, the amount of financial resources will delimits its decisions on high-commitment entry modes such as wholly owned subsidiaries.

Based on the characteristics of the resource and output conditions described above, the traditional internationalization process models seem to fit into this category. The Innovation-Related Internationalization Model covers a wide range of studies that focus on internationalization as an innovation for the firm (Bilkey and Tesar, 1977, Cavusgil, 1980; Reid, 1981; Czinkota, 1982) most typically evolving in identifiable stages. Also, the Internationalization Process Model (the Uppsala-model) grown out of empirical research, offers explanations of the sequential character of both the choice of foreign markets and the entry mode choices over time (Johanson and Vahlne, 1977 & 1990).

Each firm goes through a number of steps based on its gradual acquisition, integration, and use of knowledge about foreign markets and entry modes, and on its successive commitment to foreign markets, following the stepwise reduction of managerial risk and the generation of market knowledge. This stresses the importance of organizational learning, tacit market knowledge, uncertainty, and commitment and fosters the idea of relatively slow and incremental internationalization processes (Eriksson et al., 1997). From this perspective, the firm is seen as a fully integrated unit in ownership terms, controlled by a managerial authority who clearly delimits its resource boundaries.

Although, the validity of the Uppsala-model has been criticised as being too deterministic and pre-programmed (Turnbull, 1987; Andersen, 1993; Bell, 1995), because of leapfrogging, and too partial in explaining such a complex and dynamic phenomenon, the model seems to have some empirical support. The proposed relationship between resource commitment and managerial risk perception has repeatedly been investigated, with mixed results, leading to a number of challenges toward the theoretical construct.

Johanson and Mattsson (1988) have offered one possible answer to these voices of criticism. They expect that the validity of the model relies on internal as well as external contingencies. Externally, the internationalization of the market, including access to established international distribution and sourcing channels, may limit the causality of the model, as knowledge on international operations is already available on market terms. Internally, when managerial knowledge on foreign operations are already available, internationalization may unfold more rapidly, leading to market leap-frogging or instant globalization of the firms’ operations (Nordström, 1991). Consistent with our view, they see the Uppsala-model as only one possible route among several models of internationalization.

Moreover, as the overall economic integration of international activity leads to increasingly internationalized markets, we may expect a decrease in the predicability of the Uppsala-model. Still, it may be concluded that the Uppsala-model represents a substantial and pioneering research within the field (Andersen, 1993:228). However, the explanatory power of the model seems to be rather the exception than the rule.

Cell 2: Business-linked Internationalization

Besides internal resource creation and accumulation (i.e. firm specific advantages), firms may share resources and develop links that extend beyond ownership-defined boundaries. This may give rise to relation specific advantages, that is, those critical resources and capabilities that have been acquired through the firm’s accumulation of ties with other business partners. During the evolving exchange processes, understanding, trust and commitment etc. will often be established as the firms learn about each other’s competencies and behaviour (Dwyer et al., 1987). Also, personal relations to external business actors help in generating trust and lowering the costs of governing and developing international exchange relations (Andersen and Christensen, 1998). If business integration is successful, then the process may lead to more committed cooperative arrangements (i.e., joint production, joint venture sales subsidiary, joint marketing etc.).

The strongly business integrated SBU challenges the intrinsic connection of risk perception and resource commitment found in the Uppsala-model (McDougall et al. 1994; Bell, 1995). When SBUs/ firms get assess to external (complementary) resources such as channels of distribution and market rights that belong to other firms, they may overcome local market barriers, the lack of foreign market knowledge, as well as of other prohibitive market-related and/or investment burden factors. This, in turn, allows for more rapid processes of internationalization, as well as broader market coverage and deeper market penetration (Johanson and Mattsson, 1988).

From the perspective of the business integrated SBU in question, it may either be linked horizontally or vertically (downstream and upstream related). Its position in the business chain of value added clearly affects the pace and scope of internationalization. In the case of vertical dependency the exchange partners occupy different positions in the value chain. Hence, inter-firm dependencies ultimately rest on some form of specialization and division of labour. The specific role of subcontractors provides an example of how vertical links to upstream resources influences the internationalization process. Supplying an MNC business unit may blue-stamp deliveries to other business units and thereby provide access to the internal market of the MNC (Andersen et al., 1997).

Also, downstream-related links may act as important internationalization drivers. A trading company, having exclusive rights to use a particular brand name in a particular geographic region is one such example. Here, the trading company may benefit from the value of a particular brand name or the market reputation of the firm it is representing in its internationalization process, reducing the penetration costs of foreign market expansion. Moreover, research has shown that "inward" relations to foreign suppliers may serve as important inputs in the "outward" internationalization process (Welch and Loustarinen, 1993). Links to technology and/or component suppliers can reduce the costs of adapting products to local market needs and provide the firm with access to superior technologies, thus marshalling competitive strength toward rivals.

Horizontal links include international strategic alliances and other forms of transnational ventures involving the development of activity links that extend organizational boundaries. Horizontally linked firms may, to a larger degree, share strategic intentions and/or resource profile than vertically linked firms. Therefore, the development of a horizontal relationship may provide access to a range of additional resources in the interconnected relations of an alliance partner (Welch and Loustarinen, 1993).

Parallel to vertical links, horizontal links may provide internationalization leverage through co-distribution or co-production, and reduce the strains on the firm’s management and capital resources in the processes of internationalization (Hamill and Hunt, 1993). However, they may also involve access to other resources crucial for international market expansion, such as globally competitive technologies, joint development programs or cross-licensing (Håkansson and Johanson, 1993, Frear and Metcalf, 1995) or other resource economies of scale and/or scope (Pucik, 1988). Personal relations may reduce the coordination costs of this type of resource links (Covellio & Munro, 1995; Buckley & Casson, 1996).

Getting access to the external resources through foreign supplier-customer relations, strategic alliance partners etc. means sharing confidential information about the performance and future prospects of the business. A business integrated SBU that informs external business partners about its sources of competitive advantage may also at least indirectly inform its potential competitors and thereby increase the probability that these sources of advantage will be imitated (Barney, 1986).

Cell 3: Ownership-linked Internationalization

When the SBU is legally owned by another corporate entity, but not integrated into other corporate units (unrelated integration) or to external business partners, the exchange relationships are dominated by traditional resource and output market transactions. In this case the business unit – most often labelling an affiliate or subsidiary - is a part of a conglomerate or multi-domestic type enterprise where mostly administrative and financial links exist in terms of planning procedures, liaison roles, teamwork etc. In contrast to the firms located in Cell 1, the ownership dependent business unit (subsidiary) can get access to intra-organizational (corporate) resources mostly of the managerial and financial type. However, it may also gain access to low-cost factors of production such as raw materials, unskilled labor, and administrative practices due to exploiting market power of the parent company.

Within the corporate ownership system, the most important linkage for the firm is the potential of getting access to an internal capital market, e.g., by exploiting financial economies of scope. Access to an internal capital market represents an alternative way as the parent company competes in the external capital market and allocates capital among its various businesses and subsidiaries. This, in turn, may help the single business unit in financing its business plans, i.e., the product development and internationalization.

From the single business or subsidiary’s point of view, there are some potential gains from connecting with the internal capital market. The management of the parent company has first-hand, detailed, and accurate information about the actual plans and performance of the subsidiary (business unit) in question, compared with the information that external suppliers of capital possess. This information also provides the parent company with knowledge about further possibilities of sharing activities, exploiting scale and scope economies (synergies) with other businesses and subsidiaries within the corporate business system.

Another important intra-organizational linkage within an unrelated business system is based on sharing less tangible resources such as managerial and technical know-how, experience, and wisdom (Prahalad and Hamel, 1990). These core competencies are complex sets of resources and capabilities linking different businesses in the diversified conglomerate together (Chatterjee and Wernerfelt, 1991). Collective learning and coordination activities, accumulated knowledge and experience gained from the company’ s previous business activities are examples of core competencies having great value for all business units (subsidiaries) within the whole corporate entity.

Managerial competencies in a diversified enterprise in combination with other resources may jointly produce rents for the focal SBU because it is ownership integrated. For example, the management team of the parent company may have a well-defined core competence in the acquisition and management of businesses in international markets based on a series of guiding principles and experiences developed over the years (Hill and Jones, 1992). Also, managerial skills from the parent company, in the form of risk-taking and entrepreneurial insight in an uncertain/complex environment (new geographical markets, customer segments etc.), may give rise to entrepreneurial rent for other SBUs /subsidiaries (Mahoney, 1995).

Although internal capital allocation has potential advantages for the ownership integrated corporate company as such, the management of the parent company may in some cases not be more well informed than the external capital market. This is because of internal power struggles between subsidiary managers (high transaction costs of the hierarchy), or false and unrealistic performance report from the single organisational unit. Just as there are limits to internal capital allocation, so there are barriers on sharing core competencies within a diversified corporation.

Getting access to capital and management skills may be important for newly founded firms in order to become international from their inception. This means that the speed of the internationalization can be much higher than for an inexperienced business unit planning for the first time foreign operations. The notion of "Born Globals" has been coined to designate firms whose international developments begins soon after their inception, and which do not follow the patterns of development outlined in the traditional internationalization process models (Knight and Cavusgil, 1996; Madsen and Servais, 1997). "Born Globals" seem to fit into the category of the ownership linked internationalization, since lack of financial and managerial resources, lack of market knowledge of the individual SBU (subsidiary) may be overcome through ownership linkages to intra-organizational resource and input markets.

Cell 4. Integrative Internationalization

A SBU, both strongly ownership and business integrated within an intra-organizational corporate entity represents the fourth cell of Figure 2. If integration is a basic prerequisite for global competition, internationalization of the SBU may give rise to potentially valuable economies of scale and scope advantages of being a part of an ownership and business integrated network, operating across multiple businesses and multiple geographic markets. The gains of the financial economies of scope have already been mentioned.

However, within the fully integrated concern operating with a high degree of business relatedness, the overall risk of the business portfolio will be higher and thereby increase the costs of capital compared with the former case (Cell 3). Still, the business unit’s costs of capital may be lower than it would have obtained in the external capital market. Most important, however, are the potential sources of getting access to internal factor markets (low-cost factors of production), and output markets (channels of distribution, new geographic markets, new customers etc.).

The routes and pace of internationalization for a newly developed business that has been recently acquired may strongly differ compared to the independent SBU (Cell 1) or business integrated SBU (Cell 2). First, factor market and/or output market resource access most often creates potential of operational scope economies. The potential gains stemming from shared activities and core competencies depend first and foremost on the nature of the business links: The degree of horizontal and vertical relatedness. For example, if several businesses within the internal corporate market (or division) manufacture similar products and services, and if there are important economies of scale, learning-curve economies etc. in the manufacturing process, then each business unit may be able to reap the cost advantages.

Second, possible shared activities may be located all over the value chain both in the upstream activities (common purchasing and suppliers, common warehousing facilities, common product components, assembly facilities etc.), and down stream activities (common advertising efforts, cross-selling of products, common sales force and service network etc.). Sharing activities may not only reduce costs but may also increase the revenues for all businesses (subsidiaries) within the corporate entity. This may happen either because of the potential of exploiting a strong, positive reputation of a particular corporate entity for other of its businesses (i.e., cross-branding) or through shared sales activities by offering a bundle or set of products to the customers (i.e., sales synergies). Again, the business unit will increase its competitive position relative to what would be the case if it was not a part of an ownership and business integrated concern.

Despite the potential of activity sharing and common core competencies, important limits and drawbacks may exist from the SBU’s viewpoint. For example, horizontally related businesses/subsidiaries (e.g., manufacturing units) that share manufacturing activities (common components, assembly etc.) may have their overall manufacturing costs reduced. However, to exploit the economies of scale, these businesses may need to manufacture products using somewhat standardized components that do not fully meet their customers’ need (integration vs. local responsiveness).

A business unit selling its products and services through a common distribution channel (e.g. via other sister subsidiaries) may have lower overall sales costs, but may be unable to distribute the products to all of its customers and may not even provide the specialized selling required by the business. Other sources of scope economies within the ownership and business integrated concern may rise in order to get access to new core competencies from other subsidiaries or to leverage current core competencies in new ways.

Since the mid-1980s increasing attention has been focused on the roles and functions of subsidiaries of the MNCs. In the "new" view of the foreign subsidiary, it is recognized that subsidiaries have different roles, and are linked with each other in a rather complex way (Nohria and Ghoshal, 1994). This is in contrast to the "old" view, where the parent company (e.g., HQ) was seen as constituting the centre, and the foreign subsidiaries having either an adapter role or functioning as autonomous entities following their own local strategy (Doz and Prahalad, 1981). Lately, however, there seems to be evidence of increasing differentiation in subsidiary roles.

The large body of literature on subsidiary mandates (Roth and Morrison, 1992; Birkinshaw, 1996; Birkinshaw and Fry, 1998; Taggart, 1998), multi-centre structures etc. seems to fit into the category of the integrative firm internationalization. For example, the world products mandate is a subsidiary being given (or having taken) a global responsibility for a single product line, including development, manufacturing and marketing. From the subsidiary point of view, this arrangement ensures that high-value-added activities are undertaken by the subsidiary, as well as providing subsidiary management some degree of freedom to develop the mandate over time.

Closely related to the research on subsidiary mandates is the emerging literature on multi-centre structures or network-based MNCs (Ghoshal and Nohria, 1997). In particular, Swedish researchers have studied the emergence of divisional and functional "centres" in foreign subsidiaries of Swedish MNCs (Forsgren et al., 1992; Forsgren and Pahlberg, 1992). Applying a network approach to the analysis of the MNC means treating business relations within the corporate business system of subsidiaries (divisions) as well as between the external business partners in much the same way. Thus a subsidiary is a part of a network that includes actors outside as well as inside the corporation.

A subsidiary may achieve a strategic network position because it has access to or controls critical resources (market access, intangible firm specific advantages, patent rights etc.). The strategic network position can be used by any subsidiary to influence the behaviour of other corporate units, and sometimes the overall strategy of the MNC itself. This is not to say that the hierarchy and the action taken by top management are of little or no importance. In some cases, however, certain subsidiaries may have considerable influence within the corporate network because of a strong position, which sometimes is in opposition to the interests of the HQ. Of particular interest in the network view of the MNC is the question as to what extent the MNCs are embedded in the local (host country) economic, social, political and cultural networks (Cooke et al., 1992; Dickens et al., 1994).

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Insert Figure 3 about here

Figure 3. Propositions: Internationalization in the Business and Ownership System

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Figure 3 provides an overview of proposed propositions, concerning the pace and geographical scope of internationalization in each business context. In the case of the independent firm, we expect the internationalization process to follow a gradual and evolutionary route, where the firm gradually extends its international scope of business (P1a), based on the limitations of internal resource availability. In the B-based context, the internationalization of the SBU is dependent on its external partner. The scope of internationalization may either be complementary to the partner, following a territorial division of labour, or be similar to the partner, using the business partner’s operation as a vantage point for expansion into this particular market (P1b). Concerning the pace of internationalization, this is also expected to be relatively faster than in the independent context, as resource availability or specialization possibilities lever resource deployment for the business unit (P2b).

In the case of an O-based internationalization context, we expect the SBU=s internationalization pace to be more instant than in the Aindependent@ situation, as internal resources are available at lower costs (P1c). Moreover, we expect the international scope of operations to follow the resource profile of their parents (P2c), meaning that redeployment potential of present financial, technological and/or managerial resources will largely determine the international scope of the business unit in this context.

Finally, in the integrated business context, both resource and ownership links affect the international geographical expansion of the SBU, which in this case is actively designed by the MNC strategy. Thus, in the integrated context, decisions concerning the international geographical scope of the SBU will closely follow the dispositions of the headquarters (P1d). Moreover, the pace of internationalization is expected to be almost instant, as the business unit is born into a geographically dispersed activity and ownership structure.

CONCLUSIONS

This paper has developed a conceptual framework for understanding a broader variety of internationalization routes facing the single business unit (SBU) or the single business firm. Our conceptualization of the nature of the resource accumulation and exchange relationships enables us to examine more closely the contingencies posed by different conditions of ownership and business system integration on the internationalization processes of the SBU.

The typology developed presents different "internationalization contexts" in terms of resource accessibility on the one hand and in terms of the nature of the interdependency and independency in international exchange relationships on the other. For example, the framework gives us the opportunity to explore customer-driven internationalization instead of provider-driven, as in the traditional internationalization process models. This leaves room for the discussion of other aspects, such as intangible commitments in supplier-customer relations and networks (actors’ bonds) on existing market investments as opposed to investments in new foreign markets. Also, the strategic positioning and relationship building of central business actors in international production networks are issues that can be raised on the basis of this framework.

Moreover, our endeavor has pointed out a critical trade-off between resource leverage and strategic choice for the single firm or SBU. In general, our framework suggests, that increased resource access through ownership or business system links may increase the speed of internationalization (i.e., reduction of barriers), however, they may also restrict the latitude of strategic choices. The locus of decision-making concerning international business expansion moves outside the influence sphere of the SBU or single business firm, as its activities become increasingly dependent on access to resources outside its domain.

Therefore, from the perspective of the SBU, increased access to critical resources and skill pools in ownership-based and/or business-linked systems is likely the sword of Damocles, as the resource leverage comes at a cost in terms of decreasing influence over international market expansion and entry. This adds further complexity to the understanding of the internationalization process that conventional theorizing have overlooked.

So far, contexts of internationalization have been viewed from the perspective of the single SBU. However, from the perspective of the strategic apex of the complex multinational corporation, embodying multiple SBUs, the different contexts of internationalization may be viewed as resource regimes under which internationalization of SBUs may take place. Hence, enacting appropriate internationalization contexts for SBUs by different means of parenting and resource deployment, is one function of top level management in the multinational corporation. In relation to this perspective, an interesting research avenue concerns the migration patterns of the SBU throughout the different internationalization contexts. To what extent may these contexts reflect different types of parenting practices in the stages of SBU international development processes?

The potential insights that the conceptual framework offers should of course be judged in the light of the limitations of the present paper. First, the proposed typology has been developed independent of the environment and the industry settings in which the firm is operating. Further elaboration of the conceptual framework should consider the extent to which specific industry and home-market context leads to higher or lower levels of ownership and business system integration.

Second, the conceptual framework describes the contexts and the internationalization challenges facing the single SBU in relatively static terms. The resource accessibility and resource control, however, are a dynamic organizational process. The degree of ownership and business system integration will change over time, and with these changes the internationalization choices and options will alter. However, we will not expect an overall evolutionary tendency for a path-dependent internationalization, i.e., the single SBU within the proposed framework changes positions in an orderly way. Each firm has a unique set of options formed by its unique assets, skills and resources. Our argument implies several possible paths – depending on the contexts in question.

Although it has been beyond the scope of this analysis to look closer into the dynamic aspects of resource creation and exploitation, we may conclude that these are extremely important determinants for understanding the internationalization processes. For example, it may be hypothesized that attracting and sustaining resources for foreign market expansion depend on past performance, actor bonds, commitment, and the degree of decision irreversibility etc. While these more complex conditions of decision making process can be incorporated in the conceptual framework, their systematic development will require a much better understanding of how the internal resource creation process is manifested than currently provided in the literature. A starting point could be to incorporate relevant thinking from evolutionary economics (Nelson and Winther, 1982; Winther, 1995) into the internationalization process models and to investigate how individual skills, organizational capabilities, routines, decision rules etc. develop within an internationally orientated firm.

 

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