The Mechanisms of Internationalisation

Summary

The mechanisms of internationalisation, that is, expansion onto international markets, can be classified according to two basic criteria: the scale of necessary integration and the scale of engaging one's own capital on foreign markets. The simplest strategies, where neither a high integration capacity nor a high capital investment abroad are required, are different forms of export. The most advanced strategies, which carry a risk related to making a capital investment in geographically dispersed and diverse markets, are foreign direct investments and organising one's own subsidiaries.

Additionally, market entry modes can be of equity or non-equity type. The former includes export and contract strategies—the latter relating to contractual agreements such as licensing, franchising or strategic alliances. The second type includes joint ventures and creating a network of subsidiaries, often based on the acquisitions of other entities or on foreign direct investments, e.g. greenfield or brownfield (Pan, Tse, 2000).

Extant literature also mentions different criteria for methods of expansion onto foreign markets, which, apart from engaging one's own resources in foreign markets, include a level of risk and a level of control exercised over the network of subsidiaries (Anderson, Gatignon, 1986; Hill et al., 1990; Erramilli, Rao, 1993). The level of control over subsidiaries can range from full control, as would be the case with foreign direct investments, to shared control in the case of contractual forms of expansion (Erramilli, Rao, 1993). The extent to which a given entity knows and understands the targeted host market belongs to the criteria for making a choice of the best method of expansion, with a larger probability of foreign direct investment in the case of firms which have already had previous experience with a given market (Gatignon, Anderson, 1988; Kim, Hwang, 1992; Sarkar, Cavusgil, 1996).

In summary, the choice of expansion method reflects organic development as well as growth based on mergers and acquisitions, where a parent company reduces the cost and risk it would have to bear when entering a new market “from scratch” and building a competitive position through having to compete with local entities which are strongly embedded in the local culture and environment.

International business expansion is largely led by transnational corporations with the specifics of the process illustrated through the dynamics and directions of FDIs.