Important aspect to select the business internationalization model

Tangible business internationalization criteria are based on speed of internationalization, need for resources, foreign market penetration, control of sales and control of production (Exhibit 7-5). Those criteria work different for all four types of business internationalization. However, the overall strategy of an organization, long term vision of ownership, location and internalization, known as OLI criteria, industry and context play huge role (Gaur & Lu, 2007).
Given below is the summary of the steps involved in choosing which method of expanding business abroad is most beneficial in a particular case. Therefore, it is necessary to evaluate:
• The industry, product and service itself.
• Available and intended resources for development.
• The political, legal and economic environment of the country to which it is intended to expand.
• The cultural environment of the country to which it is intended to expand,
• Company’s long-term strategic goals.
The nature of the product or service largely determines the best way for the organization to expand abroad (Dachs et al. 2019). In the service sector, where the main resource is people, expanding into a foreign country through foreign direct investment is rare. When is highly important to motivate employees abroad in the service sector to work as if they are business owners themselves, many businesses like a fast-food restaurant business, hotel industry, tourism industry are expanding internationally through franchising. International franchises and horizontal alliances are very common in business consulting, audit, legal services and other professional services. There are no serious capital barriers to start a professional services business abroad, but experienced employees and customer trust is the key ingredient for success. As services are provided by people, customers often remain loyal to a person who serve them, but not so much to the brand. However, it is important to bear in mind, that large multinational companies often prefer multinational professional services brands, instead of local boutique style providers. So franchising is very common here.
There are a lot of examples when, after a foreign investor buys a local professional services company, its employees or former co-owners leave and start their own company. If strategic customers remain loyal to a trusted global brand, then the building a new team of experienced and skilled employees in a short term is needed, often it is challenging. The manufacturing sector is much more capital intensive. Buildings, equipment, the entire infrastructure cost millions of dollars, so an investor who buys a working factory in abroad has a little risk that the former factory workers will leave and create their own factory.
The difference is not only in whether it is a product or a service, but also in specific characteristics. For example, if the product is relatively cheap and available worldwide, export to distant foreign countries may inquire very high transportation costs making a final price of product uncompetitive abroad. For example, it is rare and unusual to export coal or gravel over long distances. If the product is labor intensive, for example the textile industry requires a lot of manual labor and then contract manufacturing or foreign direct investments to a country with cheap and abundant labor is attractive and usual. If manufacturing is very energy intensive, then contract manufacturing or FDI in countries with cheap and abundant energy is attractive too.
If the manufacturing of a product requires a lot of minerals, in this case, the aim is to shift the production to a country where these minerals are available and abundant. The availability of resources is very important to turn development plans into reality (Fielt, 2014). For an organization with very limited financial resources, foreign investment is not the best way for international expansion. Organizations with few or limited resources that grow organically often begin their international expansion by exporting what they produce. Organizations that already have a strong brand tend to opt for franchising. To obtain suppliers from foreign countries, alliance relations are often chosen. Only mature and rich multinational organizations can provide sufficient financing for their development, which allows them to carry out acquisitions or green field investments. In addition to financial resources, the commitment of human resources to the chosen internationalization type is also very important.

Ex. 7‑4 Business internationalization selection criteria

Keywords: internationalization criteria, business expansion

International expansion usually means many nights in hotels and many hours on airplanes for the management of an expanding organization, which greatly affects the work-life balance and a family life. Not all managers and employees welcome the idea of being appointed to be responsible for international development. Foreign direct investment type of internationalization requires the largest dedication of employees, because when investing abroad, the organization risks its money the most, so immediate involvement of employees and participation in the management and operations while in a foreign country is necessary to protect investments and ensure good returns. After the COVID-19 pandemic, businesses have tested, learned and mastered the use of remote communication tools, video conferencing. Remote communication facilitates international expansion and operations for organizations, but the factor of physical presence and control abroad holds significance, especially when it comes to daily control of processes, hiring employees, construction and supervision of installation works.
Another very important factor that determines the type and form of business development abroad is the economic, legal and political environment of the host country. The diversity of these environments is explored separately in Book C, Chapter 8. For example, if the country’s political system does not guarantee the inviolability of private property, or guarantees it, but there are examples when the property was expropriated by the state, FDI is a very risky option, while exporting to such a country can be a fairly safe.
If the legal protection of intellectual property in a country is weak, the franchising or contract manufacturing business form in that country is very risky, due to the possibility of illegal copying, piracy or industrial espionage, but exporting to such a country, or investing in existing or in a new factory in that country can be significantly less risky. The legal environment also determines how quickly one can establish an organization in the country, the speed at which one can obtain construction permits, how quickly one can obtain product conformity certificates for sale in the domestic market. So, depending on how relevant the speed of expansion to that country is, the way of doing business may also differ. If the procedures related to construction and certification take a long time, it means that FDI greenfield investments require a lot of time, and then it is worth considering alternative methods that do not require construction, certification or other related permits. The economic environment includes significantly more important factors. Market size, labor supply, labor cost, population’s purchasing power, education level, national currency reliability and exchange rate fluctuations, availability of energy resources, energy prices, taxes applied to businesses and residents, level and availability of transport and logistics infrastructure greatly influence the type of international business which is highly country specific. If labor is expensive in a country, energy prices are high, and then FDI in manufacturing or assembling is less attractive there. It is much more beneficial to export manufactured products to such a country, because if the labor force is expensive, the purchasing power of the population will likely be high. It is also beneficial to develop service-related businesses in such a country, especially through franchising or alliances. Very often, the type and direction of business development internationally is determined by the taxes applied in countries. Countries with low tax rates attract many investors and are often called tax or investment havens. Often in such countries, multinational enterprises register headquarters, from which management services are delivered to the entire network of subsidiaries worldwide. In this way, money from subsidiaries for services such as brand management, marketing or various royalties is quite legally transferred to the headquartered office. It strengthens motivation to register headquarters in low tax rate countries. Another important factor is stability and predictability of taxes and rates. In those countries where after each election cycle the newly elected government implements tax reforms, the investor cannot do long-term planning. Often, when taxes are increased in the country, foreign direct investors move their investments to other countries.
Differences in cultural environment are explored extensively in Part C, Chapter 9 of the book. Individual cultural elements related to the traditions and attitudes of people in different countries, such as attitudes to work and leadership, are examined in chapter 10 of the book. It is crucial to consider cultural aspects when selecting a business development strategy to apply in a specific country (Prieto-Sanchez & Merino, 2022). For those who intend to export it is very important whether the product exported in that country will be in the same demand as before it was domestically. Tastes and fashions vary greatly between countries. Even with the development of a fast-food restaurant franchise and the aim of standardizing the hamburger to achieve economies of scale and uniformity, it still has to be adapted to European, Asian and American tastes. Consumers in Asian countries use a lot of hot spices because of traditions that rooted by the necessity to disinfect food. Americans like significantly sweeter products than Europeans as consequence due to different regulations on the level of added sugar in food. Global companies tend to homogenize cultures to standardize products and to achieve economies of scale, so branded jeans or sneakers are the same regardless of country or culture. Cultures and traditions are often determined by dominant religions. Some religions forbid eating pork, some forbid eating beef, so depending on the country an organization is going to expand into, it is very important to evaluate in advance a product or a service and its features and composition against the tastes, habits and norms abroad. The way of doing business is greatly influenced by the cultural aspect of the approach to work and leadership. Investing in manufacturing abroad may be a good decision, especially if there a work is considered a value and a virtue, where the population is poor and strives to earn money by hard work. As opposite there are countries and cultures where working is a shame, where people work just a little to meet minimum needs; there it would be very difficult to motivate employees to work hard and to reach quality standard.
The examples listed above are important when choosing the type of business expansion abroad, but the most important is the company’s vision and strategic goals. Sometimes, due to the strategic goal of capturing as much of the market as possible, organizations choose an expensive but quick way, for instance acquires other firms abroad. Sometimes the organization’s strategy is to develop only through franchising, so organizations take risks and develop a franchise business model even in countries with low legal protection of intellectual property. Organizations take risks and make decisions based on their strategy, even if, in a limited assessment, the decision of the business model in a specific country contradicts the theoretical norms and practical calculations. However, this does not mean those organizations do not make calculations or that their managers do not know the theories that are described in this textbook. On the contrary, knowledge of theories allows an organization to properly prepare for possible threats and risks and to know what to expect in a specific situation before entering foreign market or investing abroad. Thus, the criteria for choosing the method of business internationalization are essentially three: economically pragmatic, phases based and strategic.
The economically pragmatic criteria essentially means that when expanding business to a specific country, the organization makes detailed assessments and calculations and chooses the economically best option. The strategic criterion is applied when an organization to be ahead of competitors expand into high-risk countries and achieve market dominance. By doing that organization often voluntary and consciously accepts risks and even make from first look economically unwise decisions. Sometimes economically irrational decisions are made deliberately, which are designed to block the expansion of competitors into that country. Sometimes investment decisions in a particular country have different goals than what it seems to an outside observer. The desire to seize a strategic resource, raw material or human resources of a certain qualification can be associated with the creation of a monopoly in a specific industry and the denial of access to resources by competitors. An economically irrational decision can usually be in the case of the development of a specific country or in a specific period of time, however, this decision is usually just a part of the long-term strategy of the company, the ultimate goal of which is to increase the value of the global organization or higher profits in the long-term perspective. The phasing criteria is usually used when a strategic goal requires a certain method of expansion to a specific country at a specific time, but this method may be changed later. For example, an organization can initially transfer a business to a specific country by way of a franchise, but later, after the business expands, same organization will invest in that country and take full control of business. Another example is an organization may start working in a vertical alliance and acquire its supplier later after getting familiar. Such phasing is often part of the expansion strategy to the foreign market. Each phase works as the low-risk test before making larger investments and more commitments. It is often difficult to predict the strategy when looking at the decisions of international companies from the outside. Misleading competitors is also one of possible strategies in global rivalry.
Most complex method combining all four types of doing business internationally can be the global business, which applies all the elements of those type. For expansion to different countries, it is indeed possible to apply different alternatives, considering the situation in that country, the protection of intellectual property, the probability of espionage, labor costs, reliability and quality of local partners in a specific country. It is possible to coordinate the strategy of applying very different alternatives, which takes advantage of as many alternatives as possible and avoids their disadvantages for particular type.