International Business Theories Term Paper BY Attendants The internationalization of internet-based companies: a process perspective on managerial intentionality This paper intends to outline a potential approach to investigating the path of internationalization of firms whose business models are based on digital technology. It is believed that such firms, due to specific characteristics of their product offering and industry, exhibit an idiosyncratic internationalization process overemphasis dynamism and managerial entrepreneurship.
Hence, they seem a suitable context to apply a process lens through which the Pascal model can be extended allowing for managerial intentionality. A process is conceptualized as a chain or cycle of related elements leading to an outcome, and as such it is a relevant perspective for understanding the evolution of Macs and of their foreign operation modes. A process perspective can introduce dynamism in the existing views of internationalization and help scholars look for new patterns running through different firms (Headhunters et al, 2007).
Moving away from comparing states towards comparing processes would allow for the discovery of such generalities if they exist. The Pascal model develops a process concept of the internationalization, allowing for cycles and interactions between phases. However, it advocates path- dependency and details little about the role management teams play in internationalization. It is argued here that the Pascal model can be enhanced through envisioning the internationalization process as the Joint outcome of managerial intentionality, path-dependency of knowledge, firm experience and the influence of the environment.
As the role of managers has Just recently started to be developed and considered in international business literature, this way of exploring he context of internet-based firms’ internationalization may contribute to the growing body of literature on the matter. This paper will proceed as follows. First, the Pascal model and the initialization perspectives of internationalization will be examined in brief, centering on potential ways of seeing them through a process lens. Then, managerial intentionality views will be explored.
Third, I will briefly outline the specificities of internet-based companies and what seem to be the major tensions they experience during their internationalization. Finally, I will present the framework f my research and how it will be informed by the theoretical insights reviewed. Theoretical approaches: introduction After Hemmer’s industrial organization conceptualization of internationalization and until the ass’s, scholars seemed to agree that market imperfection was crucial for the development of the process of foreign direct investment (FED).
However, the form of investment could not be explained: export, licensing or Greenfield have different levels of commitment and risk, and from Hemmer’s conception it was not clear why a firm would go for one or the other. The excessive reliance on market power has insisted as perfect competition has lost its appeal as an unrealistic, and therefore impractical, benchmark and henceforth interest has grown in how the firm advantages are generated.
The move towards perceiving firm-specific advantages as perspectives focusing on skill and knowledge as intangible assets. Since Penrose (1959) seminal work, strategic management studies have been developing in the same direction, shifting the focus from industry to the firm. Looking inside the firm has resulted in several perspectives, of which the initialization theory and the internationalization process theory will be examined in continuance. Both these theories set the grounds for exploration of the internationalization paths of Macs.
Initialization theory “Initialization theory’ (IT) sees the firm as a governance form coordinating interdependent economic activities whose existence is to a great extent explained by the characteristics of the firm-specific assets. IT enhances Hemmer’s work by predicting when firms will prefer one form of FOAM over another. It assumes efficiency is the driver of internationalization of firms and managers base their decisions on transaction cost analysis to chose between distinct forms of FED and may move awards a different form in time again based on the considerations of ETC.
Firms in this view are chains of activities striving for efficiency and having an optimal way of coordination. Seeing firms in this way allows for knowledge to be perceived as a crucial firm asset. Knowledge pervades firm know-how and products at the same time, it is firm-specific and it has implications on firm costs. Buckley and Caisson (1991) underline the knowledge production effects on coordination stating that “long- term appraisal and careful short-term synchronization (of knowledge production)… S well as) the absence of future markets” require internationalist of the market to achieve effective planning (Buckley and Caisson 1991 :39 in Foreseen, 2008). Knowledge aspects also exacerbate the effect of uncertainty as the more intangible the knowledge is upon which the new product is based, the more difficult to assess its value and market potential. Knowledge transfer further affects the coordination throughout the firm’s value chain.
Hence, when knowledge in considered – and especially when the knowledge about a firm’s offering is tacit – firms are created cause they can handle transactions of knowledge assets more efficiently than the market, reducing or avoiding costs associated with uncertainty, small-numbers bargaining, bounded rationality and opportunism. The feasibility of this view in the exploration of the internationalization of firms requires that scholars understand the nature of knowledge assets and the process of their transfer from one country to another.
Deepening into the view of competitive advantage as coming from within the firm, brings about several new perspectives, such as the ‘dynamic capability view ND the ‘knowledge-based view among others. The focus on knowledge and on the firm as a repository of knowledge, defines the behavior of the firm in the light of the need to create, preserve and extend value and hence competitive advantage through knowledge and capabilities. This perspective also brings into consideration the firm’s reaction to the environment as shaping its internationalization path.
Next, the Pascal model will be examined as the paradigm for understanding firms internationalization in the context of knowledge and capability development – or organizational learning. Pascal model and its key elements The Pascal internationalization process model suggests lack of knowledge about the foreign market is the main obstacle to international operations. To overcome this active presence in the foreign market rather than by collecting and analyzing data about it Masons and Value 1977).
Each step in the process is in function of the perceived risk associated with the new investment which depends in turn on the level of market knowledge acquired through the firm’s own operations. The process is dynamic, cyclical and path-dependent leading to the progression from gradual and tepee-wise investment in neighboring countries (initially only a small number). The later refurbishment of the Pascal model focuses it specifically on the effect of business networks and the liability of outsiders as crucial elements in the internationalization process.
The 2009 Pascal model conceptualizes internationalization as the result of opportunity-seeking efforts of the firm aimed at improving its position in its network in the host country (Cheerier at al, 2010). Market commitment is fundamental for this model and has to do with the extent to which an investment in a market activity has alternative uses. In other words, if a resource is difficult to transfer to a new market, the commitment associated with the FED is also higher. In the 2009 model, commitment is defined in terms of business network relationships.
Another important element is the country influences – institutional and cultural barriers, which in the 2009 model are less dependent on the country borders and more related to the local business networks specificities. The main difference between the initialization theory and the Pascal model is the dynamism of knowledge incorporated from the dynamic capabilities and knowledge- eased perspectives. Knowledge is a dynamic element – affected by the foreign investments and in turn influencing successive investments. Market knowledge and experience building is the main driver of internationalization.
Additionally, applying a process perspective to Macs’ internationalization allows incorporating the dynamism between the drivers promoting it. It is therefore necessary to drill deeper into the concepts of knowledge and learning as seen from the Pascal perspective. Learning in the Pascal model The Pascal model of the internationalist process is based on Carillon’s (1966) work n the trial and error approach of firms to problems related to foreign markets (Foreseen, 2002) suggesting that a balance of control and risk led to incremental decision-making process and each piece of knowledge acquired enabled further steps.
The concept of learning in the Pascal model revolves around the assumption that the knowledge valuable for internationalization is tacit and hence it must come from the firms’ own operations, rather than from research or through any other external nears. The learning-by-doing is at the core of the internationalization process mechanism – incremental steps are taken when the perceived risk is lower Han the acceptable level of risk. Additionally, the tackiness of knowledge makes it difficult to transfer (individual-dependent), hence the process is driven where learning happens, e. . At the border of the firm. As decision-makers are characterized by bounded rationality (Cherty and March, 1963), however, alternatives are considered one at a time. Further, Shank (2000) reiterates that previous knowledge would influence the recognition of opportunities, exploitation would precede and breed exploration (March, 1991). This fits with the process nature of internationalization where every subsequent stage builds on the previous one. The session) and change (learning, creation of trust and commitment) – affect each other thus expressing the dynamism of the process.
However, recent empirical observations seem not to fit the Pascal model’s premise of unavailability of information and of external nears of knowledge acquisition to identify opportunities. Empiric’s also do not fit country-by-country cautious and gradual investment and exhibit characteristics not considered in the 1977 and the 2009 model, like for example, the risk of not internationalist’s. Additionally, as path-dependency defines the experiential knowledge at the core of the Pascal model, several scholars have sited that it cannot accommodate managerial discretion (Petersen et al, 2003).
Johansson and Value (2009) defend that cumulative learning process does not deny managerial discretion. Entrepreneurial activities are associated with on-going business activities (Keener, 1973; 1997) and opportunity identification is placed at the boundary of the firms supporting the idea of subsidiary entrepreneurship (Brainwash, 1997). Johansson and Value (1977, 2009) do not deny Penrose (1959) emphasis on the value of strategic experimentation in diversification strategy through adaptive and creative responses.
For her, strategic experimentation is a component of the competitive process, and it is often the key to maintaining the existing capabilities and protection of a current advantage. There have been numerous suggestions on how to extend the Pascal model. For example, Foreseen (2002) proposes several challenging extensions based on the relationship between experiential learning and incremental behavior, emphasizing the effect of firm international experience.
He suggests firms’ pace of internationalization will be increasing dependent on the environmental stability. Firms may further rely on knowledge acquired through nears other than own experience and may internationalist without possessing any substantial market knowledge if the perceived risk of going abroad is lower than the risk of not doing so. This last point connects with the opinion that firms may be responding to isomorphic pressures from their institutional environment, e. G. F successful firms are international institutions like financial investors may pressure firms to become international in order to receive investment. We have seen in recent years, consistent with Foreseer’s (2002) four propositions, examples of the expansion of internet-based firms in several entries at the same time, replication of the full business model, with a lot of emphasis on market research and relying on the experience of the management team, Joint ventures, alliances and M&A activity rather than the firms’ experience through own operations in a certain country.
Furthermore, there has been growing attention to entrepreneurial action and to seeing the internationalization process as the outcome of intentions to expand and consequent efforts to do so (Welch and Illustration in Cheerier, Value, Johansson, 2010). This would place internationalization in the domain of international entrepreneurship and would halogen the classic B theories in the light of rapidly internationalist’s firms (Seizer et al, 2010).
It is valuable, therefore, to explore the views on the role of organizational actors in shaping the internationalization path of firms. Managerial intentionality constantly monitor process and outcomes, establish feedback channels and procedures to ensure the flow of knowledge and information. Such transfers further helped prevent the erosion of knowledge through the involvement of organizational members.
Ragman and Verb (2004) suggest intent to grow and enter new markets s a kind of managerial intentionality as most firms are not global and motivation cannot come from other sources but the firm’s management. Not going international can be seen as resisting institutional pressures for internationalization and hence as path-breaking innovative managerial intentionality (Abramson and Responses, 1993).
This suggests not only involvement of managers in internationalization activities, but also that their deliberate strategic decisions affect the progress of the internationalization process. Headhunters, Petersen and Belabored (2007) contend managerial strategic intent, entrepreneurship and strategic decision-making in general have been disregarded in the conceptualization of the internationalization of firms as evolutionary paths based on experience accumulation, knowledge exploitation and transaction cost consideration.
The authors urge for a co- evolutionary perspective (Lenin and Belabored, 1999; Belabored and Lenin, 2003; Belabored, 2005) of internationalization discovering how path dependence, firm experience, knowledge accumulation, managerial intentionality, institutional pressures and selection forces interact to produce firms’ international expansion (Flier et al, 2003). Managerial intentionality (MI), according to Headhunters et al (2007), accounts for the differences between firms in the internationalization process which are not explained only by path-dependency or experiential knowledge accumulation.
Bounded rationality of organizational actors cannot be abandoned as a concept, but what has previously been seen as a reaction to pre-determined paths and chaotic processes could be in reality resulting from deliberate managerial decision-making aimed at furthering firms’ internationalization. MI is closely related to how information is sought for and interpreted as well as how knowledge is engaged within and used the firm (Best, 1990; Van den Busch et al, 1999/2003).
Additionally, MI is not necessarily only concentrated on the top, it may be enabled through an emergent bottom-up process, as in Honda where individuals are encouraged to think independently (Heterogeneous et al, 2007). One process of fomenting innovation is through empowering the levels in the organization closest to the customer (Belabored, 1998). In the two main theories of international business: initialization (Buckley and Caisson, 1976; Hennaed, 1982) and internationalization process Monsoon and Value, 1977, 2009).
MI is seen as having little effect on firm internationalization. However, scholars have since then realized that the conception, in the first theory, that managers simply make “make” or “buy’ decisions is rather limited (Buckley, 1993) and that, in the latter framework, managers may have a prominent role in deliberately developing the internationalization process of firms (Headhunters et al (2007).
Indeed, it has been proposed to see the 2009 Pascal model as an explanation of entrepreneurial efforts aimed at improving a firm’s effectiveness and managing its growth. Cheerier et al (2010) citing Artificial et al 2003) in pointing out that opportunities are not searched for, but recognized through accidental discovery aided by entrepreneurial alertness and the current business idea recognizes personality differences and their role in creating a “knowledge corridor” for opportunities (Cheerier et al (2010:347).
In the internationalization process, uncertainty may be converted in opportunities through the process of effectuation or focusing on what can be controlled and the possible effects that can be created, optimizing decisions within the current options for action (Dew and Scratchy, 2002). Effectuation is conceptualized as very actor- and path-dependent. Petersen, Welch and Bonito (2010) explore, through a transaction cost lens, what management instruments may ensure persistent concurrence between a gradual increase of pressure for internationalist and the effectuated internationalist in the internationalization process.
In other words, they explore the role of managers balancing the progress of internationalization to ensure the most beneficial outcome for the firm. The situation they envision is relative to gradual internationalization process motivated by drivers increasing transaction cost of markets or decreasing provenance cost promoting internationalist. To improve the fit between contrasting pressures for internationalist and actual internationalist, managers combine make and buy choices aiming for an “optimal blend” (Petersen et al, 2010:141).
They show how managers can play an important role in such a situation taking decisions based not so much on knowledge of the host market, but on transaction costs and their progressive change. Another important consideration for the study of the internationalization process are the dynamic capabilities – organizational processes and mechanisms that manage firm resources – which enable the strategic adaptation o changing circumstances (Fisting and Diadems, 2007).
Dynamic capabilities can be seen as the very organizational actions creating, coordinating and integrating new knowledge and shaping the internationalization process (Sad, 2007). They also provide a connection between the actors in the internationalization process, the resources created by them and the organizational processes. The combination between effectuation and dynamic capabilities provides a view of the Pascal model where entrepreneurial capability supplements the state variables and places the entrepreneur as a source of knowledge, which is later distributed throughout the organization.
In contrast with population ecology theory or Nelson and Winter’s (1982) view that the knowledge accumulated by firms is converted in unique skill sets and is thus source of inertia and distinctive competence (Hannah and Freeman, 1977/1984), path-creating perspectives on internationalization focus more on adaptation and MI showing that firms do change their strategic directions and overcome barriers like the liability of foreignness or the psychic distance. Tech et all’s (1997) dynamic capabilities view, the strategic choice perspective (Thompson, 1967; Miles and Snow 1978/1994; etc. The learning theories and the behavioral theory of the firm of Cherty and March (1963) all bring elements of the capability of firms to be adaptive deliberately. These views are supported by the empirical findings on “born global” firms and FED activity of developing countries. Finally, the role of the environment cannot be disregarded. Institutional pressures influence the rules of the game, which define the external selection environment of the firm and thus interplay with MI (Belabored and Van den Busch, 2004).
The interactions between path dependencies of experience and knowledge and managerial intentions, internationalization and result in different positioning of firms (Belabored et al, 2001). It has been suggested that further research is necessary to open the black box of these interactions and determine the way they influence the development of Macs (Heterogeneous et al, 2007). Different antecedents of internationalization result in different paths and such paths affect organizational outcomes in various ways – it would be valuable to determine what is the effect of internationalization paths on firm performance and how it is realized.
Conclusions from the literature review and reality check The Pascal Model from 1977 suggests that firms proceed along the internationalization path through logical steps, based on their gradual acquisition and use of information about foreign markets. The Pascal Model assumes the more a firm knows about a foreign market, through its own operations and experience, the higher the level of investment in that market and subsequently in other markets increasingly dissimilar to their own (Foreseen, 2002).
Therefore, path-dependent organizational learning and firm experience are key elements of international expansion and they influence the subsequent development of internationalization activities. A major obstacle to decision making relative to the internationalization is lack of knowledge due to differences between countries (language and culture) or business networks (liability of outsiders) Masons and Value, 1977; 2009). However, when we look at the internationalization processes of firms today, it seems the predictions from the Pascal model do not always hold.
Different countries and externalities to business networks do not seem to stop firms from initiating international operations – Macs do not always expand in countries with low psychic stance before entering more distant ones, and some firms do not subject their international expansion to a learning process, but to a strategic choice to enter a specific foreign market. For instance, many Norwegian firms do not make initial foreign investments close to the home country and do not necessarily internationalist in incremental steps (Bonito and Grippers, 1992).
Another well- known example are International New Ventures (McKinney, 1993) or the “Born Global” (McDougall et al. 1994; Obviate and McDougall 1994; born internationals, Kind and Katz 2003; early internationalization firms, Arial et al. AAA; etc. ) – a term describing firms that, right from their birth, seek competitive advantage by using resources from, and by selling their products in, multiple countries. “The distinguishing feature of these start-ups is that their origins are international, as demonstrated by observable and significant commitments of resources (e. . Material, people, financing, time) in more than one nation” (McDougall et al. 1994:49). Born Global firms are usually hi-tech firms that are able to offer very specialized products or services in global niche markets to global customers with minimum adjustments. Drilling deeper into the predicted internationalization process of the Pascal model, leads to questions regarding MI and institutional environment effects.
Adopting a process view allows for dynamism in the model of the internationalization path, but in order to explain the empirical findings contrasting the current postulations of Pascal, it may be necessary to include additional variables to the model and explore The business model of internet-based firms Internet-based firms seem to go through an idiosyncratic process of internationalization, with specific challenges stemming from the characteristics of the industry. The rationale behind choosing the internet-based industry as the subject of my research is threefold.
It is knowledge intensive, it has great impact on the current economy and it can benefit specifically from internationalization. The internet-based firms or digital service providers, such as social networks and search engines, are an organizational setting that employs the Internet at the centre of their business model. These new start-ups base their business models on solving problems of businesses, such as improved security or better insight into customer behavior, or enabling people to do something – purchase products on a platform, connect with each other, etc.
The models are based on virtual technological platforms and the revenue is based on predictable revenue streams based on recurring monthly subscription fees for the products; advertising percentages; percentages on occasional purchases, etc. Certain technology is based at the core of the model, it is constantly developed through interaction with clients, it is controlled centrally from a relatively small team and it is packaged differently for every new market the firm decides to enter in.
Contrary to the widely spread belief, growth and internationalization for these firms represent a significant cost (size accounted for). Among the usual costs lie marketing, customer acquisition, legal expenses, hosting infrastructure, translation of the product into different languages, etc. The knowledge intensity of the industry comes from its dependence on CIT innovations, such as the ever increasing capacity of microprocessors and data-storage components. Such innovations enable the increasing sophistication of customer facing products and services, and require more specialized knowledge (Demises, 1988).
Betties and Hill 1995) argue that the growing environmental dynamism (longitudinal environmental variation as a change in the availability of the resources required for their survival) requires higher levels of knowledge and greater access to information, which increase the need for knowledge management (APIPA and Gonzalez, 2008). Dynamism is one of the key dimensions used to capture specificities in reference to economies and industries (Child 1972; Duncan 1972; Des and Beard; 1984).
The digital services industry counts with high dynamism and this leads us to expect that pressures related on knowledge and speed will be specifically emphasized. The impact of the internet-based industry on global economy can be seen not only from the portion of GAP these firms account for, the employment they provide or the investment they generate, but also from the fact that they have spurred the creation of new industries serving the internet-based firms.
Since the ass’s, interest in technology start-ups has grown and the US, Europe, even South America offer great amounts of venture-capital funds destined for new high-tech and Internet firms. Even then, the funds available for investment in European Internet and high-technology start-ups were estimated at round 10 billion Euro. Last year, there were several high-profile consumer Internet initial public offerings (Ipso) – Group, Gang, Linked, Backbone, Yelp, etc. Ipso to be expected in 2013 are for example security-technology maker Palo Alto Networks Inc. Online human resources software company Workday Inc. ; tech-management blocks to developers. Funding does not follow only public-to-be fast-growing enterprise technology start-ups – the most notable examples of platform-technology firms which still remain private expect subsequent rounds of funding averaging above $manly in the US. New funding models have emerged – “incubator” and “accelerator” companies like RainMaking in Denmark (www. Rainmaking. Dc) or initiatives like Tessellates of the EX. Commission.
These models support start-ups through funding, provision of office space and help to build a good, high-growth business model and enter new markets. Overall, it seems clear internet-based firms have economic importance and are changing the way business is carried out all over the world. What is then so specific about the way these firms internationalist? First, it is necessary to go back to the business model and consider the options an internet tart-up has. Its product is virtual, easily scalable, difficult to produce but easy to replicate once created.
However, as technological knowledge currently is widely available (one can practically learn how to develop a mobile application for free over the internet and really quickly), the product is easily imitable. Intellectual property, even if considered, can offer little protection due to the availability of knowledge and the fact that the competitive advantage in most cases lie in the combination between a market need and available technology and not so much on the uniqueness of such genealogy.
In summary, digitization of products is likely to increase firms’ inclination to internationalist (Petersen and Welch 2003), the ability to use the Internet to deliver services fast and cheap may lead to faster internationalization (Mahoney and Venin, 2003), but the wide availability of cheap information and knowledge through the Internet increases the risk of imitation. Next, it is necessary to consider the evolution of an internet-based firm. At the start-up phase, it usually has few resources and depends on subsequent rounds of funding from angel investors or incubator/ accelerator companies.
It may also be considering selling to the big firms in the industry. All this requires visibility. Investors expressly require that the model be scalable and to prove that firms need to expand quickly and in several countries. Hence, speed, low cost and international scale become the conditions for survival. What is common about platform technology-based firms is, according to Steve Blank, that they are a temporary organization designed to search for a repeatable and scalable business model, and not so much to execute.
Tensions between the internationalization of internet-based firms and the Pascal model The factors characterizing global digital platforms’ internationalization process are internationalization by language and high speed – wholly owned site entry mode through a country version of one global platform. This rather biased description of the kind of firm this research aims at studying has so far raised several question marks regarding relevant phenomena and their behavior in the studied context.
The central elements from the Pascal model – organizational learning, internationalization experience and country differences – interplay with managerial intentionality and the tension of maintaining low cost while protecting the business model from imitation. The apparent discrepancies between these facts and the Pascal model are: * gathering knowledge about the country the firm expands