1
Index
Introduction……….3
Chapter 1 Internationalization Strategies and Theoretic Frameworks…...………...6
1.1 Introduction………...………...6
1.2 Classical Theories………...………..…7
1.2.1 Hymer Theory………...……….………...7
1.2.2 Dunning Eclectic Paradigm………...……9
1.2.3 Kogut’s Model………..……….11
1.2.4 Porter’s Diamond Model………..……12
1.3 Entry Mode Choice: Influencing Factors………16
1.4 A RBV approach for entry modes classification……….…16
1.4.1 Introduction……….………..………16 1.4.2 Indirect Exporting………...………..17 1.4.3 Direct Exporting……….………..17 1.4.4 Contractual Modes……….………..18 1.4.4.2 Management Contract………...19 1.4.4.3 Licensing………...……19 1.4.4.4 Franchising………20
1.4.4.5 Contract Manufacturing and Turnkey Contract………20
1.4.4.6 Joint Venture………..……21
1.4.4.7 Wholly Owned Subsidiary……….………21
1.5 Entry Modes Timing and Strategy………..……...22
1.5.1 Introduction……….…...22
1.5.2 Resource Commitment and Competitive Advantage……….……...23
1.6 The Process of Internationalization………24
1.6.1 Introduction………24
1.6.2 Stage Models for Internationalization: The Uppsala model………..…25
1.7 Export Marketing Strategies………...…27
1.7.1 Introduction………27
1.7.2 Export and Marketing Capabilities ………...…30
1.7.3 Export Marketing Strategies Implementation………...32
1.7.4 Managerial Influences on Export Behavior………...35
Chapter 2 The super yacht industry………..………40
2.1 Introduction………..………40
2.2 China‘s economy overview………..…………41
2.2.1 China’s economy and major reforms from 1978………41
2.2.2 The Global Crisis and China’s Growth………..………44
2.3 Chinese consumer and luxury.………....………48
2.3.1 Chinese Consumers attitude and values toward luxury……….……48
2.3.2 Chinese Consumers Generational Shift……….…49
2.3.3 The Luxury Market in China……….………50
2.4 Classification and definition of yacht……….………52
2.4.1 Introduction………52 2.4.2 Motoryacht……….………55 2.4.3 Sailing Yacht………..………56 2.5 Actors……….………57 2.5.1 Introduction………57 2.5.2 Shipyard……….…………57
2 2.5.3 Brokerage………..………58 2.5.4 Owner………60 2.5.5 Charter……….……..………61 2.5.6 Crew………..……62 2.5.7 Customer………..……….………62 2.5.8 Italian Position………...…63
2.6 Chinese yacht industry……….………...………64
2.6.1 Introduction………...………64
2.6.2 Import Export………65
2.6.3 Chinese Manufacturers……….…….…………66
2.6.4 Overview of key China’s Super yacht Manufacturers……….………….……68
2.6.4.2 Double Happiness (DHS)……….………..………68 2.6.4.3 Sunbird………...…68 2.6.4.4 Jet-Tern……….………..…68 2.6.4.5 Cheoy Lee……….………..…69 2.6.4.6 Kingship Marine……….………69 2.6.4.7 Pryde Yachts……….…………..…70 2.6.5 Foreign Players……….……..………70 2.6.5.2 Sunseeker………...…….………72 2.6.5.3 Ferretti……….………72 2.6.5.4 Princess………....…………73 2.6.5.5 Azimut……….…………73 2.6.6 Distributors……….……….…74
2.6.7 Chinese Customer and Industry Characteristics……….…...….…74
2.6.8 Club, Boat Shows and Infrastructure……….….……80
Chapter 3 A case study: Azimut-Benetti Spa………..………82
3.1 Introduction………...82
3.2 History………82
3.3 Group Production Sites………84
3.3.1 Avigliana………...…85 3.3.2 Viareggio………...………85 3.3.3 Livorno………...……….85 3.3.4 Itajai………...………...………86 3.3.5 Fano………..………86 3.4 Company Structure……….……...………86 3.5 Products Range………..….………87 3.6 Internationalization………..…..………88
3.7 Addressing the Chinese yacht market………...………91
3.7.1 Introduction………...………91
3.7.2 Dealers………...…………95
3.7.3 Yachting Lifestyle……….………98
3.7.3.1 Ft.Lauderdale 2013, a big success……….……98
3.7.3.2 Xiamen always the biggest stand………..……99
3.7.4 Dragon Project………...……99
3.7.5 Made in Italy………100
3.7.6 Government………..……101
3.7.7 People on the market………102
3.8 The Economic Downturn………...……103
3.9 The Economic Results………112
Conclusion……….…115
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Introduction
In the modern global context, the internationalization of firms is gaining an increase of importance; in 2007 the percentage of countries with some degree of internationalization in their equity markets was approximately 63% (Stijin et al. 2007, p. 12). After the economic downturn and the deterioration of all the major developed economies, firms are looking at internationalization as an opportunity to grow despite of their stagnant domestic market.
In 2012, advanced economies such as Japan, United Kingdom, US have experienced a growth in GDP just above 1%. In the same year, Italy lost more than two hundred basis points of GDP with a growth rate of -2,5% (World Bank data1).
The first chapter of this work will be an overview of the major literature’s contributions to the internationalization debate, which will be presented by analyzing: the models and framework developed by authors; the process of internationalization and the entry modes in foreign markets.
First, the classical theories will be briefly analyzed in order to give an historical perspective on internationalization literature and understand how these theories evolved.
Second, the most important types of entry modes and the entry mode’s influencing factors will be described in order to understand why is important for firms to choose the appropriate entry mode. The entry mode choice has been illustrated following a resource-based view approach, which underlines the importance of the value chain’s activities exported in the foreign market.
Third, with the Uppsala stage model the process of internationalization is analyzed from an incremental perspective; clearly showing the different steps of the companies’ international commitment.
The first chapter will also address export marketing strategies and the managerial influence on export behavior as export usually represent a necessary first step for those companies who want to broaden their scope out of national boundaries.
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The second chapter presents a quick summary of the Chinese economic reforms path which started in 1978. In that same year a major changing in the political, cultural and economic realms occurred altering China’s attitude toward the rest of the world. That very change created the foundation for the “miracle” that allowed China to become the second largest economy of the world (Morrison 2013, p. 19). From the agricultural reforms to the access into the WTO, the aim of this summary is to show that China is standing out from the old perception of a low cost manufacturing base becoming one of the most important international players in the world market.
After reviewing these changes, their effect on the customer’s system of values, and in particular on the Chinese luxury market, will be analyzed; underlining the change of the Chinese customer’s behaviors consumption and the rapid rise of China as one of the most important world’s luxury market. To support this analysis it will be also illustrated the occurring generational shift in the Chinese society, which has contributed in depicturing the modern Chinese customer. It will be followed by an introspective of the yacht industry.
The yacht industry analysis starts from a broad description of all the actors involved. In order to understand the mechanisms and the industry’s structure, an illustration of the role of owners, shipyards, charters, crews and brokers will be provided, together with a definition and classification of the products. Later on, more attention will be given in particular to the Chinese yacht industry, a geographical segment of the global market that is showing early signals of a significant future growth. The competitors, distributors, manufacturers along with the industry and customers’ characteristics will be described in order to understand the likelihood and the feasibility for a foreign shipyard to enter the Chinese yacht market. In particular, there is a focus on the Italian’s shipyards situation in the Chinese market and their performances and perceptions in the yacht industry in general.
In the third chapter, the case study of Azimut-Benetti will be proposed as an example of the process of internationalization of an Italian shipyard in the Chinese yacht industry. First, the company’s history will be presented, outlining the major events and the important facts that have allowed to the firm to be recognized as the industry world’s leader. Secondly, its distributor network in China will be highlighted
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and its entry strategy for the Chinese market. The coherency with the theories presented in chapter one will be investigated by comparing the behavior of the firm with the predictions of the various models. Third, great attention will be given to the firm’s network of dealers as they represent the core of its strategy. As a result, a description of how those dealers are chosen and awarded, along with the analysis of their relationship with the company, will be provided.
Thanks to the information provided during the interview with the Azimut management it will be possible to compare the firm’s choices and strategies with the structure and characteristics of the Chinese yacht market and the theories’ contributes. The goal of this comparison is to understand to what extent these theories are useful to describe the process of internationalization of a firm in a foreign market. It also brings an understanding to what extent the internationalization strategy in the emerging Chinese yacht market has contributed to the firm’s growth.
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Chapter 1
Internationalization strategies and theoretic frameworks
1.1 Introduction
It is in the intention of this chapter to present the most important frameworks and models about internationalization of companies. In the first paragraph a summary of the existing internationalization literature will be presented.
The process of internationalization will be described from a theoretic perspective; analyzing Hymer, Porter and Dunning contributions. The focus will shift to a strategic perspective, where first contributions came from Porter and Kogut.
Theories that are mainly based on a macroeconomic explanation for foreign direct investment2 will not be considered in that work3. Although being aware of their importance and influence on later literature, they are practically ineffective to explain the modern global context. Hence, more importance will be given to those frameworks that direct their attention to the firm activities such as capital transfers, technology and organizational competencies.
In the second part, the internationalization process will be analyzed from an empirical point of view, analyzing the entry modes, the reasons that pull a firm to sell abroad and generally the steps that took for companies to reach out a winning strategy in the global context.
Moreover, attention will be shifted to one particular entry mode: exporting. In fact, export often stands by the first approach of a company to internationalization, thus, it has the potential to be either a step toward success or failure. Export marketing
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FDI is defined as cross-border investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the enterprise. Ownership of at least 10% of the voting power, representing the influence by the investor, is the basic criterion used. (OECD Factbook 2013)
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There are two different macroeconomic branches that refer to internationalization. The first one is based on the international trade model and the second one is based on the balance of payment theory. In particular, the balance of payment theory has been explained through the comparative advantage, and absolute advantage Adam Smith (1776). Furthermore, comparative advantage theory has two different versions; the classic version (Ricardo (1817) in which the national advantage come from exporting goods that are cheaper to produce than others and the Heckscher-Olin (1933) version, that also considers the different factors dotation between nations.
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strategies, implementation, marketing capabilities and their influence on export performance will be presented and analyzed.
Managerial characteristics and perceptions will be considered in order to determine the degree to which they influence export behavior.
1.2 Classical Theories
1.2.1 Hymer Theory
The Hymer theory represents a crucial point on internationalization theories. After the divulgation of Leontief work4, that invalidates the empirical strengths of the Heckscher-Ohlin model, became evident that international trade could not only be seen at a national level anymore, “it was Hymer distinctive contribution to shift the analysis
from country to industries” (Kogut 1989, p. 384). Foreign direct investment could not
be seen just as capital flows between nations, but it had to be related to firms’ international development.
Hymer stated that the reason why companies decide to invest abroad is because they have some kind of competitive advantage. Referring to Bain’s analysis (1956) on barriers and entry modes, he showed that the drivers for internationalization can be identified in differentiation and cost advantages.
He then argued that foreign companies who decided to invest in other countries suffer from the “liability of foreignness”. It is true that local companies, which have been operating in that particular context from a long time, have some kind of advantage on them. That advantage is due to the knowledge, experience and information achieved during the years. Therefore, a firm that decides to invest abroad is called to sustain a certain amount of fixed costs to circumvent this type of barriers.
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The Leontief analysis found empirical proves that undermined the Heckscher-Ohlin model. In fact, using his input-output scheme, he showed that “the U.S., the most capital abundant country in the world by any criterion, exported labor-intensive commodities and imported capital-intensive commodities” (Leontief). That was incompatible with the Heckscher-Ohlin results and impaired the importance of the model.
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However, these costs are not always enough to prevent all types of barriers. Some barriers, such as cultural divergences and consumer’s habits may occasionally be insurmountable.
On the contrary, foreign companies may have some competitive advantages. On the cost advantages side there can be: control of production technics protected by licensing, imperfection in factors or goods markets and economies of scale. On the other hand, differentiation advantage can be: consumer preferences and brand reputation, superior product design control, contractual power and economies of scale.
Hence, the decision to whether or not invest in internationalization depends on those kinds of advantages. Hymer also investigates the original distribution of these advantages between firms; he states that the advantages distribution is due to casualties such as historical events or natural resources availability and that future distribution is not necessarily influenced by the present.
After Hymer contributions others had used his perspective to analyze the organizational implication of internationalization processes on firms. Most of these researchers belonged to the Reading University.
As to the transaction cost5 approach, multinational firms have to choose between two different forms of foreign investment. The first one is related to a vertical approach, the goal is to substitute the market processes with integration and supply chain support. The second has a horizontal approach; is related to know-how transfer difficulties, firms invest on same types of plants in different countries so that they can substitute the market without losing capabilities. The last one refers to finance and fiscal strategies, the head firm act as an intermediate between the other firms transferring capitals and substituting the market when it fails or it is not very developed.
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Transaction cost definition has been defined by Coase in his 1937’s paper “The nature of firm” as “the cost of using price mechanism”. Nonetheless, in literature the are some ambiguity “two definitions prevail in the literatures: one that defines transaction costs as only occurring when a market transaction takes place; the other defining transaction costs as occurring whenever any property right is established or requires protection. I have called these the neoclassical and property rights definitions and have argued that which definition is useful depends on what question is being examined. Douglas W. Allen. “Transaction Cost “ (1999) Simon Fraser University.
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1.2.2 Dunning Eclectic Paradigm
The most important contribution from the Reading theories6 is the eclectic paradigm.
This theory elaborated by Dunning (1977, 1980, 2000) aimed to integrate and reconcile the most relevant concepts emerged from the internationalization debate.
Starting from the mid-1950s the author developed a framework which its objective was to investigate the pattern of internationalization of production financed by foreign direct investment. He states, “I have argued that the eclectic paradigm is
best regarded as a framework for analyzing the determinants of international production rather than as a predictive theory of the multinational enterprise”7.
The Author first identifies four different categories of firms depending on the type of goal that drives their international development. Location requirements for a company who decides to reach beyond national borders vary depending on their goals. In fact, categories are built considering the motive that explains why companies decided to invest in foreign countries.
In the first group we find natural resources seekers firms. Their aim is to lower natural resources or labor costs. That is the case of raw materials or agricultural products; since they tend to be location specific, foreign direct investment may be needed to support a constant supply for these goods or to acquire them for cheaper. For example, the flows of investments in the 1800s directed from industrialized country toward the less developed one (Dunning 1993).
Market seekers firms are in the second group. Their intent is to serve new markets. Thus, foreign direct investment is due to serve local or adjacent territories markets. Most common factors that pull the organization to seek new markets are transportation costs and government regulation, as the transportation costs get lower the opportunity to address and meet new customers demand gets more attractive. Government regulations can be referred to factors that represent obstacles to foreign
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Besides Dunning other important authors from the University of Reading are: Buckley and Casson, Williamson, Teece Coase and Rugman.
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J.H. Dunning .The Eclectic Paradigm of International Production: Past, Present and Future. International Journal of the Economics of Business 2001, Vol. 8, N. 2, pp. 173-190.
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direct investment such as complicated tax regulations. Furthermore, market-seekers firms’ foreign investment can be also explained through a strategic perspective. Companies could decide to invest beyond national boundaries in order to follow clients or suppliers’ foreign expansion or to reduce transaction costs. However, adapting products to local tastes is not always easy. Firms need dynamism and flexibility to succeed in meeting the local customers demand.
Third, efficiency seekers firms are those companies that by rationalizing their international investment structure try to benefits from differences in price, culture, economic structure and markets among nations.
Fourth, strategic asset seekers companies; in this category the author places those that want either to reinforce their competitive position or to weakening competitors. Other reasons to justify foreign direct investment can also be founded in the intention to avoid legal restriction in domestic markets, support export investment or passive investment related to real estate.
According to the Author the foreign direct investment is explained by looking at three different determinants. The ownership advantage is represented by a unique competitive advantage that allows the firm to compete in the foreign market Ownership advantage may be product innovation, brand, operating flexibility and dimension. Location is also extremely important; the decision to set production plants in a foreign location rather than in a domestic has to be undertaken taking in account the related consequences. Sometimes different input prices, production quality and artificial barriers among nations can lead to localization advantages. The internalization advantage is related to organizational issues, firms that are willing to invest in foreign countries have to trade off control and costs. They need to decide whether to contract with a local company or provide the service or product by themselves.
The importance of the framework stands by his capability to be the point of reference for other theories which, by themselves only, could not explain the internationalization process properly. For example, ownership advantages have been identified by later literature in four different types: advantages from the deployment of
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natural national resources; advantages derived by monopolistic and oligopolistic power (Hymer 1960; Caves 1971, 1983; Porter 1980, 1985); advantages from control of scarce resources and competencies and managerial advantages (Wernerfelt 1984; Barney 1991; Teece et al. 1997). The four types as a collective form an exhaustive review of ownership advantages, which they do not if taken one by one.
1.2.3 Kogut’s Model
Kogut based his model on two main research questions; in which activities do companies need invest more resources? To what extent a firm’s value chain has to be internationalized? To answer those questions he looked at two different theories. From the international trade theory he derived the location-specific advantage. Companies seek for a specific location in order to gain an advantage, for example by moving the R&D function in industrialized countries. Since countries possess a national comparative advantage, firms have the incentive to move parts of their value chain to deploy this opportunity. From Porter’s theory (1980; 1985) the Author derived the firm-specific advantage. In fact, firms possess a competitive advantage that comes from their ability to transform input in output, their management skills and their organization.
The synergy between those two advantages identifies three different internationalization modes. When only national comparative advantage exist commercial trade is inter-industries; investment are directed toward nations that possess an advantage and firm activity is mostly confined to procurement, firms vertically integrate. On the other hand, when there are only competitive advantages trade flows can be intra-industries and firms usually decide to invest to penetrate markets. In this case horizontal integration occurs. Eventually, there is the case where both advantages coexist. Interactions between them determine a very complex dynamic, which gives the firms a certain degree of operating flexibility. This flexibility is a result of arbitrage opportunities and leverage opportunities. In later works Kogut argued that this operating flexibility is profitable for the firm.
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1.2.4 Porter’s diamond model
Another important framework is the Porter’s diamond model. The author illustrates two basic concepts: national competitive advantage8 and a firm competitive advantage9. The national competitive advantage is illustrated by factor conditions, demand conditions, strategy, related and supporting industries, structure and rivalry. He also includes two more elements, government and chance. Porter refers to factor conditions as classical trade theorists do. In fact, he considers basic factors such as land labor and capital. In addition, he also includes other factors such as educational level of the workforce and the quality of a country’s infrastructure. In particular, he analyzes factor conditions referring to dotation and hierarchy.
Factors dotation represents the national stock of production inputs such as human resources, physical resources, knowledge resources, capital resources and infrastructures. On the other hand, cost of labor and workers’ productivity, universities research hub for innovation, cost of capitals and quality of infrastructure can all contributes to the nation competitive advantage. Hierarchically, the author distinguishes between basic and advanced factors. The first are those inputs inherited from natural resources, climate and geography and the seconds are those factor needed to sustain superior and durable competitive advantage. An example, for instance, would be technology. Advanced factors are based on basic factors. Heavy investments are necessary to transform those in highly-specialized, thus hardly replicable, assets. As the author states, “Basic factors do not constitute an advantage in
knowledge-intensive industries. Companies can access them easily through a global strategy or
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As the Author states, “National prosperity is created, not inherited. It does not grow out of a country’s natural endowments, its labor pool, its interest rates, or its currency’s value, as classical economics insists. A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers.” Porter, M.E. “The competitive advantage of nations”. New York: Free Press. (1990)
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“Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s costs of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or provides unique benefits that more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation.” Porter, M.E. Competitive Advantage. New York: Free Press. (1985)
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circumvent them through technology”. Nevertheless, selective disadvantage in basic
factors can push companies toward innovation. Under certain conditions those disadvantages can be transformed in competitive advantages. When there are early signals of a condition that will spread to other nation and when there are encouraging conditions in other elements of the diamond.
Figure 1.1 Porter’s Diamond Model
Porter (1990)
That is to say, new factors are created in industries where nations inherited some kind of given resources, but sustainable competitive advantage10 is given only by advanced factors.
Demand conditions are the second determinant for the national advantage. Conditions considered are: domestic demand composition; domestic demand
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Sustainable competitive advantage is defined by Porter (1985) as “above average performance in the long-run”. That “long-run” is not specified but as Beal (2000) affirms: “rather than specifying the amount of time that differentiates a sustained from a temporary competitive advantage focuses on specifying the sources of sustainable competitive advantage.”
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dimension and growth model; internationalization of domestic demand. In fact, character and composition of the home market heavily influence the firm’s behavior abroad. Large and identifiable home-demand industry segments allow companies to build a competitive advantage when represented by smaller segments in foreign markets. Customer’s expectations and needs drive demand composition, firm’s quality level and product characteristics are pulled by them. The nature of domestic buyers is also to be considered, sophisticated and demanding buyers drive the organization toward a deeper understanding of customer needs. Furthermore, local buyers’ attributes and diffusion of a nation’s value often influence exports. Local buyers can sometime anticipate, to some extent, foreign customer needs; giving the chance for the firm to gain a competitive advantage based on past experience. The spread of a nation’s value makes the foreign buyers adapt easier. Dimension and demand growth path play an important role in building national advantage. Serving big segments of demand can be either a good thing or a bad thing. The firm can accomplish economies of scale and reach high technological levels but, on the contrary, can be unable to attain flexibility and dynamicity. The demand for dynamism grows just as fast as the demand for product or service grows and industrial investments that follow it. At a certain point saturated markets pull firms in two different directions. Internally, in order to make customers exchange their old product version new functions are added to products. Externally, they are pushed to shift their offer to foreign markets in order to continue to grow. Sometimes, domestic demand can also be internationalized. Due to multinationals and local buyers, especially for certain sectors that correlate with travel, customer preferences can be transmitted to foreign markets. In addition, imitation of domestic products by foreign firms also influences foreign customer’s needs.
Considering the role of related and supporting industries, Porter affirms that when they are internationally competitive they can represent a source of competitive advantage for the firm. In fact, downstream industries can gain advantage from home-based suppliers through the warranty of rapid, efficient, cost-effective and sometimes preferential access to inputs such as components and machinery. Moreover, related
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and supporting industries, due to cultural similarities and close working relationships encourage innovation and technology exchange. Regarding supporting industries, quick and constant flows of information and ideas have a positive effect on innovation process in a mutually advantageous reinforcing feedback. For home-based related industries, technical interchange and information flows can upgrade the speed rate of innovation and also increase the probability for companies to learn new skills and different market approaches.
The last determinant described by the author is strategy, structure and rivalry. National circumstances and context have a strong influence on how companies are created, organized and managed. This, in turn, cultivates rivalry amongst companies. Strategy and structure very differs from nation to nation. In fact, competitiveness can be explained considering the interaction between sources of competitive advantage, management practice and organizational modes in a specific industry. Furthermore, a firm strategy is also characterized by the way individuals and organizations seek to achieve their goals; characteristics of capital markets, compensation practices for managers and individual motivation to work are important elements in this framework. Rivalry refers to the degree of competition between firms. Strong competition is considered to be a positive incentive to create persistent competitive advantage. The author considers domestic rivalry as important as international rivalry. Firms that face fierce domestic competition are more likely to have success abroad. Therefore, companies that compete on the same ground and are continuously called to answer the pressure of rivalry improve their competitive advantage.
Casual events and government also affect competitive advantage. Events like wars, inventions, politics, technology or input discontinuity are out of the firm’s control, those casualties give new players the opportunity to raise and become a threat. Besides, the government can influence and become influenced by the four determinants. For example, demand conditions are influenced by taxation and regulations. Nonetheless, government power alone is insufficient to create a competitive advantage.
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All those four determinants, their characteristics and interactions, form the national competitive advantage. Needless to say, the diamond has to be seen as a system as the author recalls “the effect on one point depends on the state of others” also “the points of the diamond are also self-reinforcing” (Porter 1990).
1.3 Entry mode choice: influencing factors
Owning a competitive advantage is a necessary prerequisite for a firm to operate abroad. Entry mode has been defined as “an institutional arrangement that makes
possible the entry of a firm’s products, technology, human skills, management, or other resources into a foreign country” (Root 1983, 1994).
In addition, there are several other factors that influence entry mode decision. According to Naresh K. Malhotra et al. (2003) there are various moderating factors, namely, market variables, global strategic variables and transaction-specific factors. Market variables such as country, location, demand, and competition risk, force firms to choose an appropriate level of resource commitment and control (Hill, Hwang, and Kim 1990).With attention to global strategic variables as synergy, motivation and concentrations, can usually be exploited through a high level of control on overseas operations. Similarly, when the firm has a high degree of control, transaction-specific factors like firm’s specific know-how are more likely to be protected from market failure risk. Lastly, entry modes decision can be moderated by government imposed factors. Both the host and the home country government can affect firm’s international and domestic operations and consequently the willingness to commit a large or small amount of resources.
1.4 A RBV approach for entry modes classification
1.4.1 Introduction
An alternative approach based on RBV explanation for entry modes has been developed by Sharma and Erramilli. They illustrate different entry modes based on a
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combination of four different hypotheses. These hypotheses can be summarized as likelihood of the firm establishing competitive advantage in production activities or marketing activities in the host country and ability to transfer advantage generating production resources or marketing resources to the host country partners. While the first two illustrate location of activities the second pair illustrates their ownership.
1.4.2 Indirect exporting
Export can be defined as the transfer of good and services out of national borders through indirect and direct modes (Young, Hamill, Wheeler, and Davies 1989). Indirect exporting is the most preferable way to enter a market when the firm lacks of international market knowledge and seek for a low risk involvement. In addition, export can sometimes represent a mean for an organization to further involve their business on the foreign market. In that type of arrangement, a firm carries out its production and marketing-related activities at home and has no investment or presence in the target host country. Another home country firm will perform its products marketing operations. It can be an export management company, a trading house, or an export broker (Kotabe and Helsen 1998).
Value chain activities are not transferred; therefore, very little control is exerted on foreign markets by the organization. Intermediaries sell products on their behalf bearing risks and eventual losses. Selecting criteria for export management firms are their strong presence in foreign markets and their resource compatibility with market conditions (Fingar 2001; Williamson and Bello 1984). Hence, indirect exporting mode is related to a low firm’s likelihood to establish a competitive advantage in production and marketing operations in a host country.
1.4.3 Direct exporting
The firm’s direct involvement in host country marketing operations of its products can be referred to as direct exporting. In direct exporting intermediaries do not bear the risk of the unsold, besides they allow the firm to access important market
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information. The company maintains, to some extent, control on price and distribution and is able to protect patents and intangibles.
There are two paths that a company can follow: direct exporting via company owned channel or direct exporting via a host country intermediary. The firm’s inabilities to realize a production-related advantage along with the ability to generate a marketing-related competitive advantage leads the firm choose one of these two paths. The choice varies depending on the transferability of its marketing competencies. Therefore, if the firm is unable to transfer the key advantage generating marketing resources to host country intermediaries or does not need them to access its valuable resources, it will choose direct exporting via company owned channels; otherwise will choose direct exporting via host country intermediaries.
A third channel that has grown lately, thanks to IT innovation, is the internet thereby eliminating intermediaries it directly connect producer with customer.
1.4.4 Contractual modes
Coherently with the market failure paradigm11, contractual modes are also explained among this RBV entry modes approach. In particular, contractual modes are issued when the firm believes that there is the chance to establish competitive advantage in production or marketing operations in the host market, and when these advantages can be easily transferred to host country partners. For example, key marketing and production knowledge can be easier protected if codified; in that scenario, the advantage can be transferred without the risk of losing it. There are many types of formal cooperation modes, Contractor (1984) defined those agreements as to the extent of dependency between organizations that they provide and the degree of firms’ participation to the decisional process that they regulate. Examples of
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Universally speaking market failure may be defined as the inability of a market or system of markets to provide goods and services in an economically optimal manner. Charles Wolf defines market failure from two different perspectives: equity and efficiency “markets may fail to produce economically optimal outcomes or socially desirable outcomes”. The response of firms to market failure is internalization.
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contractual modes are management contract, licensing, franchising, contractual turnkey and contract manufacturing.
1.4.4.2 Management contract
Management contract is an arrangement between two different enterprises where one performs operational control and necessary managerial functions for the second in return for a fee. A myriad of functions can be covered by this kind of arrangement: technical operation of a production facility, management of personnel, accounting, marketing services and training may all be involved. Nonetheless, management contracts do not give the right to make decisions on strategy, long term investments or dividend policy.
1.4.4.3 Licensing
Licensing is a written agreement in which the contractual owner of a property, or activity, gives permission to another part to use that property or engage in an activity in relation to that property. Licensing can be divided in real, personal or intellectual agreement. Usually, licensor exchange the right to produce or distribute a product or service against licensee royalties’ payments. This particular kind of entry mode is more likely to be undertaken by those firms that possess technology breakthrough in processes or products. In fact, as Contractor (1984) argues, that proprietary advantage needs to be attractive in terms of differentiation or costs structure in the target market when compared with competitors’ products. It goes without saying that transferred resources have to be protected through legal or other means, so that licensor firm can enjoy the revenues and profits flowing from them. In literature two issues have been addressed regarding licensing related risks. First is appropriability, some nations do not provide an effective intellectual property protection and some competencies are more likely than others to be reproduced. Second is cost opportunity, factors like technology transfer costs, licensee effectiveness on foreign markets have to be taken into account when considering
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licensing against other alternatives. This is the reason why foreign nation characteristics have often played a strong influence on that choice.
1.4.4.4 Franchising
Franchising is a form of licensing that is defined by a long-term cooperative relationship between two entities, a franchisor and one or more franchisees. Is based on an agreement in which the franchisor provides a licensed privilege to the franchisee to do business. Objects of a franchise agreement can be trademarks, brand names, production, service and marketing methods or the entire business operation model. The franchisee can market products and services under the franchisor's brand name and for a defined period of time is provided with exclusive access in a defined geographical area. A distinction can be done between franchising agreement and management service contract. While the first one provides the franchiser with relatively little control over day-to-day operations, the second provides the licensor with extensive onsite control over technical and management support aspects of an operation. Therefore, firms choose franchising mode when their advantage generating resources are fully transferable to local partners and prefer management service contracting mode when some of their resources and capabilities are not transferable (Erramilli, Agarwal, Dev 2002). The main disadvantage related to this entry mode is related to the profit margin reduction due to the franchisee retribution.
1.4.4.5 Contract manufacturing and turnkey contract
Contract manufacturing is when an international company hires a local firm to produce goods designed for the local market. The contract manufacturer will provide its product characteristics, technology and technical assistance. On the other hand, turnkey is “a contract where the essential design emanates from, or is supplied by, the
contractor and not the owner, so that the legal responsibility for the design, suitability and performance of the work after completion will be made to rest with the contractor. Turnkey is treated as merely signifying the design responsibility as the contractor's”
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1.4.4.6 Joint venture
Joint venture is a business agreement in which two or more parties agrees to develop, for a finite time, a new entity and new assets by contributing equity. Equity involvement can be realized through financial resources, capital assets contribution or trademarks and technology. The main purpose for undertaking an international joint venture lies in the development of a project. Hence, they are often limited in purpose, scope and duration. The parties exercise control over the enterprise and consequently share revenues, expenses and assets. Their level of commitment can be different from each other, and is proportional to their capabilities and to the nature of the venture. Accessory agreements are usually established in order to decide roles and competencies between partners. The RVB approach distinguishes between production joint venture and marketing joint venture. The choice of establishing a production join venture is explained by the inability for the firm to transmit the advantage-generating marketing resources to local partners while advantage-generating production resources are transferable. A marketing joint venture is preferred when just advantage-generating marketing resources are transmitted, but not advantage-generating production resources.
1.4.7 Wholly owned subsidiary
The last kind of entry modes is the wholly owned subsidiary. This entry mode can be compared to a start-up investment in new facilities. It requires a lot of time and financial effort to be established, though, it does provide the greatest control over affiliates. Acquisitions represent a faster way in terms of building a sizeable presence in foreign market, yet are fraught with risk of overpayment, inability to fully assess the value of acquired assets and post-acquisition challenges including cross-cultural integration (Chang et al. 2001). When the firm is unable to transfer any advantage to local partners but is highly confident that it can realize a competitive advantage in production and marketing activities undertaking the host country, it will establish a wholly owned foreign subsidiary.
22 1.5 Entry modes timing and strategy
1.5.1 Introduction
With regards to formulation of an international strategy four fundamental stages of intentional strategic decisions have been identified: strategic market potential analysis, single markets attractiveness evaluation, strategy formulation and implementation (Marafioti, Perretti, Saviolo 1998). Nonetheless, it is not uncommon to find situation where internationalization has been driven by unexpected events, opportunity or coincidence.
An interesting study on foreign market entry timing has been conducted by Murray, Ju, and Gao (2012), as it shows how entry timing is related to market share and firm survival. As early entrants, firms in the international market may enjoy various advantages, however, they suffer from greater risks and high uncertainties than late entrants (Delios and Makino 2003; Frynas, Mellahi, and Pigman 2006; Wang, Chen, and Xie 2010). In fact, early entrants in international markets, to enjoy first-mover12 advantages, have to face a higher degree of risk and uncertainties than in the domestic markets. For example, they can find in the host market’s institutions the central influential force for the business environment, which may constrain the optimality of the firm’s actions and consequently represent a high level of institutional uncertainties (Dikova and Van Witteloostuijn 2007; Pan, Li, and Tse 1999).
Examining trade-offs between market share and profitability, researchers have found that early entrants gain a larger market share, while late entrants gain a marginal advantage in profitability (Cui and Lui 2005). Hence, in order to analyze the trade-off between market share and firm survival in foreign markets is important to examine which strategic choice influences the most these factors.
The study focuses on entry timing and investment size. Results on a sample of 25.513 foreign firms that have made FDI in China show that while early entrants gain
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Lieberman and Montgomery define first-mover advantages as “the ability of pioneering firms to earn positive economic profits”. Furthermore, they identify three primary sources for first-mover advantages: technological leadership, preemption of assets, and the creation of buyer switching costs.
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a higher market share they also suffer from lower survival rates than late entrants. Hence, managerial strategic choices are fundamental in order to balance the existing trade-off between high market shares performance and survival rates. Research on interactions between investment size and entry timing suggests that equity joint ventures and wholly owned subsidiaries are positively related to a firm’s survival. That is to say, early entrants with large initial investment can better exploit and are more likely to realize first-mover advantages. In doing so, that they are rewarded with high enough market share to survive in foreign market.
1.5.2 Resource commitment and competitive advantage
When a strategic plan has been issued all the elements that construct it are part of it have to be related to long-term firm objectives. The first approach that we consider identifies alternative entry modes according to different degrees of resources commitment and strategic motivations that push toward internationalization. There is a positive relationship between gaining a competitive advantage and resources commitment, which makes it very difficult for a firm that does not have a high level of commitment to gain an important competitive advantage. However, also strategic motivation has to be taken into consideration. In fact, a high resource commitment is not always the best way. When taking advantage of spots opportunity, other modes are preferable. Participation in foreign shows and product selling through brokers can be a perfect example of this. When foreign market is likely to grow, there can be two examples of low and high commitment entry mode. Respectively, the firm can decide to export product via trading companies or representative offices. They both are entry modes that guarantee the firm a presence with relatively low commitment. That choice allows the firm to mitigate risk in the case of market failure. On the other hand, when firms want to gain an important competitive advantage, a high resources commitment is necessary. In that scenario companies should choose between a joint venture and wholly owned foreign enterprise. (Marafioti 2003)
24 1.6 The process of internationalization
1.6.1 Introduction
After having reviewed various types of entry modes the process of internationalization will be now addressed.
Internationalization has been defined as “the simple extension of economic
activities across national boundaries” (Peter Dicken 2011). The word process is being
used to underline the dynamic and evolutionary nature of internationalization.
There are two different types of motivations that influence a firm’s decision to take their business international, internal and external. Internal reasons are related to the opportunity to exploit or enforce an existing competitive advantage (Hymer, 1970) in order to gain market power (Buckley-Casson 1976). That competitive advantage can be a cost leadership or a perceived uniqueness in a product or service. It goes without saying that in order to exploit a competitive advantage in the foreign market firms have to understand and satisfy the critical success factors of that particular market. Sometimes a firm’s internationalization is driven by the economic environment conditions. Increasing national competition from both domestic and foreign competitors can lead to an industry passive internationalization. The firm, confronted with those kinds of restraints and opportunities is pushed to broaden its scope past national boundaries. Those situations are recognized as external reasons for a firm to start the internationalization process. Internal reasons are a result of planned analysis with specific goals. External reasons are a result of a reaction. Firms do not internationalize on their own initiative but in order to confront competitors’ threats. The metaphorical lines drawn between internal and external causes are vague. Interaction between firms makes it difficult to clearly recognize the cause and effect. For instance, if a company has the resources and the competitive advantages to expand abroad but cause an adverse foreign economic environment it would lose all its incentive to conduct internationalization. Hence, the interaction of both internal and external factors is crucial to understand why firms decide to invest abroad.
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Another important issue when it comes to internationalization process is the role of a firm’s corporate management. Given the long time resource commitment and all the efforts needed for the organization to succeed in undertaking a foreign market, a managers’ positive attitude toward internationalization is a fundamental attribute. In literature that attitude is explained by several factors. For example, the type and level of managers’ education can influence the global vision of the firm. If a manager know one or more foreign language he is more likely to consider opportunities out of the national boundaries and direct its attention to foreign markets.
1.6.2 Stages models for internationalization: Uppsala model
There are different models in literature that aim to explain the development of the internationalization process13. Central to those models is the incremental changing paradigm. With regard to a firms’ internationalization process, those models share three assumptions. First, a firms’ level of resources commitment and international activities evolves from low to high. Second, this evolution can be divided in stages. Third, those stages are unidirectional. The fact that changing stages are incremental means that any signal of regression toward an early stage has to be interpreted as an indicator of a strategic failure. For example, a signal can be represented by a significant reduction of revenues from export activities. Moreover, the progressive nature of stages can be explained by two factors: difficulties in obtaining information and lack of experience in foreign markets. Those factors also represent an explanation for the high uncertainties that a firm has to face in a foreign market.
The most influential methodology among these models is the Uppsala Internationalization model. On the basis of the behavioral theory of firms (Cyert and March 1963), the theory of the firm’s growth (Penrose 1959) and the incremental decision making process described by Carlson (1966) is to develop a theoretical framework for the process of internationalization. This model, developed by Johanson
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Life-cycle product model (Van de Ven, Poole 1995); Uppsala model (Johanson, Vahlne 1990, Andersen 1993), Stage approach (Johanson, Wiedersheim-Paul, 1975; Dichtel et al. 1984; Miesenbock 1988, Leonidou 1995; Westhead 1995; Gankema et al. 1996)
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& Vahlne (1990, 1997), is based on a study sample of Swedish firms and identifies four different stages in internationalization development.
In the first stage there is no regular export activity. Firms experience occasional exporting and have no knowledge regarding the foreign market. Export activity is driven by a few orders and there are no incentives for further development. With knowledge increase, a firm can reach a second stage in which export activity is conducted via independent representatives. By doing so, a firm acquires more information about that market and in turn uncertainty is reduced. The last two stages are represented respectively by the establishment of a sales subsidiary and an oversea production. At this stage there is a full involvement.
The gradual involvement of the firm is theoretically explained by state aspects and change aspects. The authors refer to state aspects as the degree of market knowledge and commitment. Change aspects, on the other hand, are described as commitment decisions and current activities. Thus, from a certain degree of market knowledge through change aspects a firm changes its commitment. The interaction between the state aspects, intermediated by change aspects, leads the firm on a casual path-dependent cycle. The process is driven by the knowledge gained by experience acquired through current activities that influence the amount and type of resources committed. Furthermore, the authors introduced the concept of psychic distance.
Psychic distance is defined as “sum of factors preventing the flow of
information from and to the market. Examples are: differences in language, education, business practices, culture and industrial development” (Johanson and Valhne 1977).
Thus, organizations tend to operate first in markets that are familiar with and closer in term of psychic distance to the host market.
Although the model is a good representation of the internationalization process some critics can be swayed. First, there is a lack of broad empirical evidence that support the hypothesis. It is very common for firms to not follow a predetermined pattern but jump from stage to stage in a non-sequential way (Turnbull, 1987). Secondly, the role of environment and strategy changing is not taken in consideration in the model. The evolutionary path of stages predicts only one direction. Third, that process is intended to explain only the internationalization of marketing activities
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while nowadays all activities from the value chain are experiencing delocalization. On the other hand, the framework can help firms to understand the circular nature of stages (Caroli 2000) as every stage is based on the resources and knowledge built on the earlier stages.
1.7 Export marketing strategies
1.7.1 Introduction
Export strategies are fundamental for the firm both in a growth and survival perspective. Resources have to been accurately allocated in order to export products in the foreign markets successfully. In literature, marketing strategy is considered one of the major elements of export performance. Thus, the development of a strategy is mandatory for any firm that is willing to achieve performances in exporting. While marketing strategy is defined as a procedure through which companies react to competitors and market forces situation, or react to environment forces and internal forces to achieve their objective and goals in target market through all aspects of the marketing mix, products, prices, promotion, and distribution (Slater et al. 2009; Lee, Griffith 2004), export marketing strategies are “ the means by which a firm respond to
the interplay of internal and external forces to meet the objective of the export venture. It involves all aspect of marketing plan that including product, promotion, pricing and distribution.” (Cavusgil and Zou 1994). Therefore, it is clear from those definitions
that a well-developed marketing strategy is likely to positively influence the export strategy and in turn, export performance.
Moghaddam et al. (2011) have developed an interesting framework in which they analyze those effects. As many authors have asserted, export marketing strategy consist of four elements, product, price, promotion and place.
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Figure 1.2: Conceptual Framework
Source: Moghaddam 2011
Promotion has been found to have a strong effect on intensity and sales growth of export, while it provides a limited contribution to profit (Leonidou et al. 2002). Promotion-related activities can be identified in advertising, sale promotion, personal visit, trade fairs, personal selling and promotion adaption. All of these activities are founded to have a positive influence on financial and nonfinancial measure of export performance. In addition, given their different characterization, they have a different impact depending on the context. For example, sale promotion through coupons, samples, premiums and other tools are useful in low-income economies, or where advertising restrictions are issued, and where is high competition. Furthermore, personal selling is convenient when the cost of managing a sales force is low. Trade fairs can be advantageous in providing a test for the specific export market or be a first step towards new relationships or collaborations. Personal visit can increase export performance disclosing problem and opportunities while enhancing communication and personalized relationship.
From a distribution perspective, place also represent an important element of export marketing strategies. Nowadays exporters show to have more control on distribution activities as well as time of delivery and distribution channel (Eusebio et al. 2007). Lages et al. (2004) had shown that distribution network and availability are determinants of export performance. In that framework, elements such as transportation costs, dealer support and foreign market conditions have to be taken in consideration. In particular, foreign market conditions can heavily affect export
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performance. Nonetheless, using sales representative offices and direct purchasing seems more likely to have a positive effect on intensity of sales export than the adaption of distributor agent or merchant would have on export performance (Leonidou et al. 2002).
On the product marketing strategy side, there are a lot of product dimensions that can positively influence export performance. Leonidou et al. had synthetized those dimensions in product design, brand mix14, warranty, pre-sales and after-sales customer service and product advantages such as luxury, prestige and quality. Lages et al. (2004) had also identified other determinants for export performance such as level of innovation. Furthermore, product adaptation, referred to as the adaptation of the product to meet the requirements of export customers, has also a positive effect on export performance (Zou 1994). Nonetheless, it has to be considered that not all export markets need adaptation. That is why often small and medium enterprises choose low adaptation market in order to avoid high resources commitment.
The last element of export marketing strategy is price. Recent changes in international market have made pricing strategy increasingly significant for exporters (Langes, Montgomery 2005). With regard to pricing strategies, they analyze both pricing penetration strategies and prestige pricing approach. While the first one is based on offering low prices in order to obtain large market share and penetrate the market, the second is related to product differentiation and customer perception. Lee and Griffith (2004) found that both pricing strategies can have a positive effect on export performance. Other considerations, in regards to elements related to price strategies are sales term, credit policy and currency policy. Sales terms have shown no significant influence on export performance. On the other hand, credit policy looks to be related with an increase in profit but not with export growth. Moreover, currency policy seems to not have a positive financial influence on performance but it increases export intensity. In conclusion, this framework provides an interesting review of all the determinants related to export marketing strategies and contributes to a deeper
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understanding of the relationship between price, promotion, place and distribution and export performance.
1.7.2 Export and marketing capabilities
As a first step toward internationalization exporting is critical to determine whether the firm will have success or not in the foreign markets. Therefore, is important to understand which factors impact export performance in order for the management to make the right decisions in undertaking export activities.
A recent study conducted by Murray, Gao and Kotabe (2009) using a sample of 1.314 export ventures firms located in China aim to address, through competitive advantage and marketing capabilities, how market orientation influence export ventures performances.
Market orientation is defined by Jaworski and Kohli (1993) as "the
organization-wide generation of market intelligence, dissemination of the intelligence across departments and organization-wide responsiveness to it", meaning it consists
of export market intelligence creation, circulation and receptivity that are focused on export customer, competitors and environmental changes (Cadogan et al. 1999, Kohli and Jaworski 1993). There is no doubt that market orientation plays a critical role in the domestic market, but is even more important when the firm is considering expanding abroad. In fact, market orientation plays a fundamental role to develop and market the appropriate goods and services that are valued by customers in export markets (Diamantopolous et al. 2000, Murray et al. 2007). Nonetheless, market orientation as a resource has just a potential value, organizational capabilities are necessary to deploy it and obtain the desirable performance. Those capabilities are often embedded within organizations, they resides in processes and actions that follow managerial decisions over time. In particular, marketing capabilities are the result of the market knowledge and understanding of customer needs built over past experiences by using market orientation (Day 1994). For example, pricing capabilities are needed to quickly respond to changes and enjoy higher revenues on the export market. New product development capabilities are used to align new products and
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services offerings to customer’s needs. Moreover, good marketing communication capabilities enable the firm to manage export customers’ value perception. The firm builds those capabilities during time.
However, performance is also driven by competitive advantage. To achieve higher performance the firm is required to take appropriate strategic actions to capitalize on market orientation and create a competitive advantage (Ketchen et al. 2007). Capabilities represent the organizational processes through which resources are combined and transformed into value offerings, resulting in firms’ competitive advantage (Aulakh et al. 2000). The authors investigate which marketing capabilities mediate the effect of market orientation on performance.
Since market orientation has only a potential value in influencing performance, it is necessary to evaluate through which internal and external environmental factors marketing capabilities are developed. Internal factors considered are coordination mechanism and cost leadership strategy. The first one consists of inter-related themes of cooperation, teamwork, common work-oriented goals, and communication (Cadogan et al. 1999, Narver and Slater 1990). Since export market knowledge has a tacit and complex nature, knowledge integration mechanisms allows transferring and sharing this knowledge within the firm in an effective way. Coordination mechanism and cross-functional teams can transform this knowledge in a value-creating process molding the perfect environment for market orientation activities to be performed effectively. Thus, coordination mechanism strengthens the effect of market orientation on marketing capabilities. The second factor, cost leadership strategy is assumed to have a weaker effect on marketing communication and new product development than on pricing capabilities. In fact, as collection and concatenation of information from the environment depends on business strategy type (Matzuno and Mentzer 2000), for a firm pursuing a cost leadership strategy, the attention would be focused on collecting and analyzing pricing information and developing pricing capabilities rather than other activities. External conditions considered are market turbulence and competitive intensity. Those two factors can impact the relationship between market orientation and marketing capabilities. As an example, when market is turbulent huge amount of marketing information may be needed. The reason has to be found in the quick
