International_Operation_Managment

INTERNATIONALIZATION PROCESS OF COMPANY In an increasingly globalization economy, many firms are driven by the need to expand business to international market Company which this essay is about is based in Pakistan in the city of Lahore which is well connected transportation wise and is one of the largest cities of Pakistan. The company which this essay looks into is a leather manufacturing company established in 1988 it is a family run business and company is making leather garments for direct export orders and indirect export orders as well. The present essay is about the leather garment manufacturing firm based in Lahore Pakistan. Company is expanding and looking for clients abroad. We will look into different ways how company can go international. The literature on the internalization process of a firm can broadly be divided into two streams of theories the economic approach and behavioral approach. (Anderson 2000; Benito and Cripsrud 1992; Mort and Weerawardena 2006). In the increasing globalization economy, many firms are driven by the need to expand business to international market. The decision to go to international market or the decision making process regarding internationalization of a firm moves around the choice of market, timing on entering the new market and mode of entry.(Betty and David 1997) According to Anderson 2000 the economic approach has its base in economic and focuses on company environment. The basic assumption of the economic approach is that firms are quasi rational in their choice of investment and the decision makes has access to accurate information (Anderson 2000; Buckley, Devinney and louviere 2007.) regarding the country or market they are planning to internationalize. Because as stressed by Internationalization scholars that the mode of internationalization is one of the most important decision that has to be made by companies. (Bradley, 2005) Where as in behavioral approach the importance is to treat individual learning and top managers as important aspect in understanding the firm’s international behavior (Clercq, sapienza and Crijins 2005) in other words this approach is more towards the development of skills and knowledge from foreign market. We will look into Dunning Electic theory and International Product life cycle IPLC model for our company from economic point of view and Uppsala model from behavioral point of view. According to John H. Dunning the Electic paradigm model form of concrete international operation that a foreign firm takes in a particular target market is a result of 3 advantages. First the firm must have a specific ownership advantage that compensates for the general liability of foreignness. Secondly the location advantage of target market has to be identified and to be evaluated with the firm’s strategy third to retain assets and skills within the firm rather them renting out to third parties in term of franchising and licensing. (Dunning 1988). According to this theory N&F will look for specific owner ship in foreign market and look for suitable location for its operation rather than selling its product through franchising and licensing. But this could be really hard and firm may find it difficult to do so as it is a family run business and the main obstacle is the resources.( Family Business Review, Vol. 21, No. 2, 151-167 (2008) ). If we look according to Vernons 1966/2004 International product life cycle model the form of entry into foreign market depends on the life stage of the product (Galan and Gonzales-Benito, 2001), passing through the stage of introduction growth and maturity ( Almor, Hashai and Hirsch 2006). The introduction stage is domestic and innovators locate production at home where the product was developed ( Almor et al 2006). The firm is primarily engaged in exporting and that will continue until firm acquires the enough knowledge of the foreign market to shift production abroad (Kwon and Hu 1995; Melin, 1992; Sikorski and Menkhoff 2000). During the growth stage firm export activities increases and the demand for product expands additional market over time the firm locate production activities in nearness to consumer.( Almar etal 2006; Galon and Gonzaliz- Benito 2001; Lou, Zhao and Du 2005; Melin 1992). At the maturity stage major markets are saturated and certain degree of standardization of the product has usually taken place ( Malin 1992) According to Vernon 1966/2004 at this stage there is likely to be a considerable shift in the production location to less developed countries where the production cost is less ( Almor etal 2006. lou, Zhoa and Du 2005 Melin 1992) at the end firm will export from less developed countries back to original country ( Sikorski and Menkhoff 2000). Same is the case with N&F it is manufacturing and exporting leather garments the firm is in maturity stage and growth stage with its different market and market trend for leather product in certain market it has reached its maturity stage in certain market e.g. England company use to export a lot and at maturity stage the export to this market increased tremendously but a time came when the leather got out of fashion in this market and company shifted to different market. As the company it self is based and manufacturing in developing country such as Pakistan so when a maturity stage for its product comes in certain market as mentioned above it will look for another market to export or internationalize as according to transaction cost approach (Grcini I Vinnslu 2009) which argued that firm in home country has internally developed intangible asset primarily know how and other advantages. May be in certain years when Pakistan is developed and maturity stage occurs for its product it might shift production to less develop country. According to Uppsala model which is the most cited model of internationalization N&F will enter the international market gradually to avoid the risk associated with going international for a new firm in new market. As supported by the Uppsala internationalization model which emphasizes that international market is a gradual process determined mainly by the fact that firm avoid risk by gradually acquiring knowledge, expertise, and resources and gradually making necessary commitments. (Johanson and Vahlne 1977). International business activities are claimed to start with markets that are culturally and or geographically close known as psychic distance and is determined by cultural distance( hymer 1976; hofstede 1980;) as well as geographic distance ( lineman 1966; krugman 1991; Hirsch/hashai 2000) between countries gaining experience. But now days the whole world has become a global village due to good transport links, communication advancement methods. Most Companies follow an internationalization process that can be divided into 3 main stages. Experimental Involvement, Active Involvement and Global Involvement.( http://globaledge.msu.edu) N&F has passed the experimental stage in which firm is an irregular exporter, and export to one or two close markets. N&F is exporting to countries directly and indirectly for some time now. Company is in second stage which is called active involvement in which company starts to identify foreign market for exporting, international business is given priority, specific resources are devoted to developing opportunities. In this stage N&F can start with entry modes that do not need substantial commitment and resources this could be done through agent or indirect exporting. This is called the first phase of internationalization in Uppsala model. Things to be kept in mind is “key determinants of the internationalization pathways taken by family firms are the level of commitment toward internationalization, the financial resources available, and the ability to commit and use those financial resources to develop the required capabilities.”(Family Business Review) Main draw back with this process is foreign business can be lost if exporter decide to change their supply this is why many companies that begin in this manner generally change to direct export. (International business 11th Ed MC Graw hill pg 427 ch 16) After an initial expansion with low risk involving indirect exporting to similar markets company can improve their knowledge of foreign market and gain more experience. Over time this lead to an increase in commitment to foreign market and expansion into more distinct market including equity investment on offshore manufacturing and sales operation. (Working paper series Niron hashai, tamar Almar no.02/22 Sep 2002). Another way to describe the internationalization include the network theory approach which emphasizes the impact of business relation ships, both informal and formal upon the internationalization of firm (Collinson and Houlden, 2005; Coviello and Munro 1995; Mort and Weerawardena 2006) According to (Coviello and Munro 19995) Network contributes to the success of the firm by helping to identify new market opportunities and contribute to building market knowledge. Network theory argues that international market entry is more dependent on network than institutional, economical and cultural conditions. (Gluckler 2006).( Grcini I Vinnslu 2009) The network theory brings recognition that firm’s internationalization is not a solo effort but it is a result of network relationships that are both formal and informal. (Mtigwe 2006) Born Global firm are more to be related to network theory approach as stated Born Global are highly entrepreneurial small firms that quickly internalize without the time or need to develop firm specific advantage in their hoe nation ( Contractor, 2007; Jones and Coviello, 2005 Mort and Weerawardona 2006) These firms lack resources compared to large multinational firms but their advantage rests on learning derived from abroad from their ability to coordinate and cross national borders. (Grcini I Vinnslu 2009) N&F can be more classified into the category of born global as the firm is manufacturing and exporting leather garments since its creation as due to its product category and climatic conditions of Pakistan. Leather garments cannot so sold all year round in Pakistan so the company is exporting its product to market where weather conditions are favorable and has good business relation ties with its clients from several years. Internationalization process with different theories and models has been described The economic approach theory does not seem to describe the whole process of internationalization process of the companies. We can use the terminology of these approaches to study companies. The Uppsala model states that internationalization is step by step and is not a rapid process according to this model companies will tend to internationalize in a market with short psychic distance. But nowadays the whole world is a global village. Some questions has been answered but more questions remained open REFERENCES Anderson, S. (2000). The Internationalization of the firm for an enterpreneurial perspective. International studies of management and organisation 30, 63-92 Benito, G.R.G and Gripsrud G. (1992) The expansion of FDI; Discrete rational location choices or a cultural learning process. Journal of international Business studies 23, 461-476 Betty Jane Punnett & David A Ricks International Business 2nd Edition 1997 Black Well ch8 pp205. Almor, T., hashai, N. and Hirsch, S. (2006) The product Cycle revisited; Knowledge intensity and firm internationalization. Management international Review, 46, Dunning J.H. (1988) The electic Paradigm of international production; A restatememnt and same possible extensions journal of international business studies 19,1-31. Peter J Buckley, Pervez N. Gh uri The Internationalization of the Firm : A Reader by Publisher: Ceng ge Learning 1998 EME Higher Education Buckley, P.J. and Ghauri, P.N. 2004 Introduction and overview. The internationalization of the firm A Reader ix-xx London. Thomson Learning. Buckley P. Buckley, Is the International Business research agenda running out of steam', Journal of International Business Studies 33 (2002), pp. 365–373 Contractor, F.J. (2007) Is International business good for companies. 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Slide 7) http://fbr.sagepub.com/cgi/content/abstract/21/2/151 International business 11th Ed MC Graw hill pg 427 chapter 16 Grcini I Vinnslu 2009 The internationalization process theory VS two cases snjal Olafsson og Audur Hermannsdottir Haskoli Island 1-23 Working paper series Niron hashai, tamar Almar no.02/22 Sep 2002 [pic]