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CHAPTER 3 Internationalization theories

3.1 Introduction

Having discussed rhe barriers to starring inrernationalizacion in Chapter 2, we will begin this chaprer by presenting rhe different theorerical approaches to international marketing and then choose three models for further discussion in Sections 3.2—Section 3.4.

Historical development of internationalization

Much of rhe early literature on internationalization was inspired by general marketing theories. Later on, i nte r na ci ona 1 iza ci on dealt with the choice between exporting and foreign direct in vest men r (FDI). During rhe past 10—15 years there has been much focus on inter nd tionaliz Arion in networks, where a firm has different relationships not only with customers bur also with other actors in the environment.

The traditional marketing approach

The Penrosian tradition (Penrose, 1959; Prahalad and Hamel, 1990) reflects rhe traditional marketing focus on the firm's core competences combined with opportunities in the foreign environment.
The cost-based view of rhis tradition suggested that the firm must possess a 4compen- sating advantage' in order to overcome rhe 4cosr of foreignness' (Kindleberger, 1969； Hymer, 1976). This led to the identification of technological and marketing skills as the key dements in successful foreign entry.

'Life cycle' concept for international trade

Sequential modes of internarionalizarion were introduced by Vernon's (1966) 4pnxiucr cycle hypothesis', in which firms go through an exporting phase before switching first to market-seeking FDI and then to cost-oriented FDI. Technology and marketing factors combine ro explain scandardizanon, which drives Icxration decisions.
Vernon's hypothesis is that producers in advanced countries (ACs) are 'closer' ro the markets than producers elsewhere; consequently the first production facilities for these products will be in rhe ACs. As demand expands, a certain degree of standardization usually takes place. 'Economies of scale' through mass production, become more important. Concern about production cost replaces concern about product adaptations. With standardized products the less developed countries (LDCs) may offer competirive advantages as production locations. One example of this is the movement of production locations for personal comp uters from ACs to LDCs.

The Uppsala internationalization model

The Scandinavian 4 st ages' models of entry suggest a sequential pattern of entry into successive foreign markets, coupled with a progressive deepening of commitment to each marker. Increasing commitment is particularly important in rhe thinking of the Uppsala School 0 oh an son and Wiedersheim-Paul, 1975； Johanson and Vahlne, 1977). The main consequence of this Uppsala i nter nations I izatio n model is that firms tend co intensify their commitment to foreign markets as their experience grows (see also Section 3.2).

The internationalization/transaction cost approach

In rhe early 1970s, inrermediate forms of internationalization such as licensing were nor considered interesting. Buckley and Casson (1976) expanded the choice ro include licensing as a mean& of reaching customers abroad. But in their perspective rhe mulrinarional firm would usually prefer to 'internalize' transactions via direct equity investment rather than license its capability. Joint ventures were nor explicitly considered ro be in the spectrum of governance choices until rhe mid-1980s (Contractor and Lorange, 1988； Kogut, 1988).
Buckley and Casson's focus on market-based (externa lizarion) versus firm-based (inter- nalizacion) solutions highlighted rhe strategic significance of licensing in market entry. Internationalization involves two interdependent decisions 一 location and mode of control.
The inrernalizarion perspective is closely relared to the transaction cost (TC) theory (Williamson, 1975). The paradigmatic question in internalizarion theory is that, upon deciding to enter a foreign market, should a firm do so through internalization within its own boundaries (a subsidiary) or through some form of collaboration with an external partner (excernalization)? The internalization and TC perspectives are both concerned with the minimization of TC and the conditions underlying marker failure. The intention is to analyse the characteristics of a transaction in order to decide on rhe most efficient,i.e. TC minimizing,, governance mode. The internalization theory can be considered rhe TC theory ot the multinational corporation (Rugnian, L986； Madhok, 1998).

Dunning's eclectic approach

In his eclectic ownership-locarion—internalization (OLI) framework, Dunning (1988) discussed the importance of locational variables in foreign investment decisions. The word 'eclectic' represents the idea that a full explanation of the transnational activities of firms needs co draw on several strands of economic theory. According to Dunnings rhe propensity of a firm to engage itself in international production increases if the following three conditions are being satisfied:

1. Oivnership adrantages. A firm that owns foreign production facilities has bigger ownership advantages compared with firms of other nationalities. These 4ad vantages' may consist of intangible assets, such as know-how.
2. Locational advantages. It must be profitable for the firm to continue these assets with factor endowments (labour, energy, materials, components, transport and communication channels) in the foreign markers. If nor, the foreign markers would be served by exports.
3. InternaliZiUion advantages. It must be more profitable for rhe firm to use its advantages rather than selling then), or the right ro use them, co a foreign firm.

The network approach

The basic assumption in rhe network approach is that the international firm cannot be analysed as an isolated actor but has to be viewed in relation to other actors in the inter* national environment. Thus the individual firm is dependent on resources controlled by others. The relationships of a firm within a domestic network can be used as connections to other networks in other countries (Johanson and Mattson, 1988).
In the following three sections (Sections 3.2—3.4) we will concentrate on three of the approaches presented in this section.

The difference between cultural distance and psychic distance

Cukural distance (discussed in Chapter 7) refers ro the (macro) cukural level of a country and is defined as the degree to which (factual) cukural values in one country are different from those in another country, i.e. 'distance' between counrries.
Psychic distance (as used in this rexr, e.g. in the geographical dimension of Figure 3.1) can be dehned as the individual manager's perceprion of rhe differences between the home and the foreign market, and it is a highly subjective inrerpretarion of reality. The purpose of psychic distance is to capture rhe individual managers' perceptions and understandings of the 'distance' between two inter nation al markets, whereas 'cultural distance' focuses on a national level analysis (Avloniti and Filippaios, 2014). Therefore, psychic distance cannot only be measu red with factual indicators, such as publicly available statistics on levd of education, religion, language and so forth. Sousa and Lages (2011) suggest that the definition of4psychic distance' should consist of ruro dimensions of 'disrance':

• Country characteristics distance： level of economic development, communication infrastructure, marketing strucrure, technical requirements, market competitiveness and legal regu la cions.
• People characteristics distance: per-capira income, purchasing power of customers, customer lifestyles and preferences, level of education, language and cultural values (beliefs, atneudesand traditions).

By assessing psychic distance at rhe individual level on different dimensions, it is possible to rake appropriate steps to reduce rhe manager's psychic distance towards foreign nurkets (Sousa and Bradley, 2005, 2006). We would expect that the manager's perception of psychic distance toward a foreign marker will have an impact on rhe degree of adaptarioil/standardi- zacion of the different dements in the international marketing mix. Spedficaily, we expect that the higher the psychic distance between two markets, the greater the adaptation of rhe international marketing mix (product, price, place and promotion) is needed.

3.2 The Uppsala internationalization model

The stage model

During the 1970s, a number of Swedish researchers at rhe Universiry of Uppsala (Johanson and Wiedersheim-Paul, 1975; Johanson and VahIne, 1977) focused their interest on the internarionalizanon process. Studying the internarionalization of Swedish manufacturing firms, they developed a modd of the firm's choice of marker and form of entry when going abroad. Their work was influenced by Aharoni's (1966) seminal study.
With these basic assumptions in mind, the Uppsala researchers interpreted the patterns in the inremarionalization process they had observed in Swedish manufacturing firms. They had noted, first of all, that companies appeared co begin rheir operations abroad in markers rhar were fairly close geographically and only gradually penetrated more far-flung markets. Seconder appeared that companies etitered new markets through exports. It was very rare for companies to enter new markets with sales organizations or manufacturing subsidiaries of their own. Who Uy-owned or majoricy-owned operations were established only after several years of exports to the same market.
Johanson and Wiedersheim-Paul (1975) distinguish between four different modes of entering an international market, where rhe successive stages represent higher degrees of international involvemenc/market commitment:

• Stage 1: no regular expon activities (sporadic export)
• Stage 2: exp ort via independent represent rives (export modes)
• Stage 3: establishment of a foreign sales subsidiary
• Stage 4： foreign produaion/manufacturing units.

The assumption that rhe inc er nationalization of a firm develops step by seep was originally supported by evidence from a case study of four Swedish firms. The sequence of stages was restricted to a specific countr)r marker. This market commitment dimension is shown in Figure 3.1.

The concept of market commitment is assumed to contain two factors-the amount of resources committed and the degree of commitment. The amount of resources could be operationalized to rhe size of investment in rhe market (marketing, organization, personnel, etc.), while the degree of commirmenr refers to the difficulty of finding an alternative use for rhe resources and transferring them to rhe alternarive use.
International activities require both general knowledge and market-specific knowledge. Market-specific knowledge is assumed ro be gained mainly through experience in rhe market, whereas knowledge of rhe operations can be transferred from one country to another; the latter will thus facilitate the geographic diversification in Figure 3.1. A direct relation between market knowledge and marker commitment is postulated: knowledge can be considered as a dimension of human resources. Consequently, the better the knowledge about a market, the more valuable are the resources and rhe stronger the commitment to the market.
Figure 3.1 implies that additional marker commitmenr as a rule will be made in small incremental steps, both in the market commirmenr dimension and in rhe geographical dimension. There are, however, three exceptions. First, firms that have large resources experience small consequences of their commitments and can take larger internarionaliza- rion steps. Second, when market conditions are stable and homogeneous, relevant marker knowledge can be gained in ways other rhan experience. Third, when rhe firm has considerable experience from markets with similar conditions, it may be able ro generalize this experience to any specific market (Johanson and Vahlne, 1990).
The geographical dimension in Figure 3.1 shows that firms enter new markets with successively greater psychic distance. Psychic distance is defined by the individual manager's perception of rhe differences in terms of factors such as differences in language, culture and political systems, which disturb the flow of information between the firm and the market. Thus firms start internationalization by going ro those markets they most easily understand. There they will see opportunities, and the perceived market uncertainty will be low (Brewer, 2007).
The original stage model has been extended by Welch and Loustarinen (1988), who operate with six dimensions of intemauonalizarion (see Figure 3.2):

1. sales objects (what?): goods, services, know-how and systems；
2. operations methods (how?): agents, subsidiaries, licensing, franchising management contracts;
3. markets (where?): polirical/cultural/psychic/physical distance differences between markets；
4. orgivtiz^tional structure: export department, international division；
5. finance: availability of international finance sources ro support rhe international activities;
6. personnel: international skills, experience and training.

Of the six dimensions in Figure 3.2, three of the&e (4, 5 and 6) are concerned with an internal resource-based view, which is also consistent with a recent caregorizarion of internationalization archetypes which uses the following six dimensions (Cerrari et aL, 2015)：

1. internationalization from the demand side (ratio of foreign sales co total sales);
2. resources kxrated abroad (amount of resources rhnr go overseas);
3. geographical scope (number of countries or regions in which rhe firm operates);
4. inrernarional orientation (percentage of managers with inrernational work experience);
5. business networks (percentage of foreign sales that go through external agents/ distributors vs own subsidiaries — FDI)；
6. financial inrernanonalizarion (share of foreign ownership).

The underlying assumption in the Uppsala model is that intemarionalization is a slow, rime-consuming and iterative process. This was confirmed by a recent case study on the Volvo heavy truck business, in which Vahlne et aL (2011) concluded that, when the industry is highly complex and uncertainties involved are immense, inrernarionalizarion decisions made coo quickly and too boldly run a real risk of Failure, with potenrially large and negative consequences. The globalization process of the Volvo heavyr truck business showed that learning plays an important role and that rhe creation of new srrucrures, sysrems and relationships is required. This means that the management has to accept that rhe globalization of rhe company may proceed ar a slower pace to allow for learning and adjustment to take place.

Critical views of the original Uppsala model

Various criticisms, of the Uppsala model have been put forward: one is that the model is too deterministic (Reid, 1983; Turnbull, 1987).
It has also been argued that rhe model does not take inro account interdependencies between different country markets Johanson and Manson, 1986). It seems reasonable to consider a firm mere internationalized if it views and handles different country markets as inrerdependenr than if it views cheni as completely separate entities.
Studies have shown that the incernationaIizanon process model is not valid for service industries. In research inro the internationalization of Swedish technical consultants — a typical service industry — it has been demonstrated that rhe cumulative reinforcement of foreign commitments implied by rhe process model is absent (Sharma and Johanson, 1987).
The criticism lias been supported by the fact that the internationalization process of new entrants in certain industries has recently become more spectacular. Firms have lately seemed prone to leapfrog stages in rhe establishment chain, entering ^disrant' markets in terms of psychic d is rance at an early stage, and the pace of the internationalization process generally seems co have speeded up.
Nordstrom's (1990) preliminary resuIts seem to confirm this argument. The UK, Germany and rhe US have become a more common target for the very first establishment of sales subsidiaries by Swedish firms than their Scandinavian neighbours.
The leapfrogging tendency not only involves entering distant markers. We can also expect a company to leapfrog some intermediate entry modes (foreign operation methods) in order co move away from the sequentialist patrern and more directly ro some kind of foreign investment (Figure 33).
In market number 1 rhe firm follows the mainstream evolutionary pacrern, but in market nu mber 6 the firm has learned from the use of different operation methods in previous markets, and therefore chooses to leapfrog some stages and go directly to foreign investment.
Others have claimed that the Uppsala model is not valid in sicuarions of highly iiiterna- tionalized firms and industries. In these cases, competitive forces and factors override psychic distance as the principal explanatory factor for the firm's process of internationalization. Furthermore, if knowledge of transacrions can be transferred from one country to another, firms with extensive international experience are likely to perceive the psychic distance to a new country as shorter than firms with little international experience.
Nordstrom (1990) argues that the world has become much more homogeneous and that consequently psychic distance has decreased. Firms today also have quicker and easier access ro knowledge about doing business abroad. It is no longer necessary to build up knowledge in-house in a slow and gradual trial-and-error process. Several factors contribute to this. For example, universities, business schools and management training centres all over the world are putting more and more emphasis on internacional business.
Probably even more important continuous growth in world trade and foreign direct investment has resulted in an increase over time of rhe absolute number of people with experience of doing business abroad. Hence it has become easier to hire people with rhe experience and knowledge needed, rather than develop it in-house.

The spectacular development of information technologies, in terms of both absolute performance and diminishing price/performance ratios, has made it easier for a firm to become acquainted with foreign markets, thus making a leapfrog strategy more realistic (see also Section 35 on internet-based born global).
In spite of rhe criticisms, the Uppsala model has gained strong support in studies of a wide spectrum of countries and situarions. The empirical research confirms that commitment and experience are important factors exphining internarional business behaviour (Cumberland, 20()6). In particular, rhe model receives strong support regarding export behaviour, and the relevance of cultural distance has also been confirmed.
In a more recent ar ride, Johanson and V ah hie (2009) updated their model in parallel with the new findings on com pa n i es5 i n te r na ci on al iz a ci on. In their updated model they have pur more emphasis on networks (as initiated by Johanson and Manson, 1988) and opportunity recognition within rhe internationalization process. They see a firm's problems and opportunities as becoming less a matter of becoming familiar with certain export countries, and more related to relationships and networks. They recognize that new knowledge is mainly developed in relationships, and nor so much in specific international markets.

3.3 The transaction cost analysis (TOA) model

The foundation for this model was made by Coase (1937). He argued that firm will rend to expand until the cost of organizing an extra transaction within the firm will become equal to the cost of carrying our the same transaction by means of an exchange on the open market' (p. 395). lr is a theory which predicts that a firm will perform internally those activities it can undertake at lower cost through establishing an internal (ihierarchical,) management control and implementation system whik relying on rhe market for activities in which independent oucsiders (such as export intermediaries, agents or distributors) have a cost advantage.
Transaction costs emerge when markets fail ro operate under the requirements of perfect competition ('friction free'); the cost of operating in such markets (i.e. the transaction cost) would be zero, and there would be lirrJe or no incenuve ro impose any impediments ro free market exchange.However, in rhe real world there is always some kind of 4fricrion, between buyer and seller, resuking in transaction costs (see Figure 3.4).
The friction between buyer and seller can often be explained by opportunistic behaviour. Williamson (1985) defines it as a 'self-interest seeking with guile'. It includes methods of misleading, disrorrion, disguise and confusion. To protect against the hazards of opportunism, the parries may employ a variety of safeguards or governance structures. The term 'safeguard' (or alternatively "governance structure') as used here can be defined as a control mechanism, which has rhe objective of bringing about the perception of fairness or equity among transactors. The purpose of safeguards is ro provide, at minimum cost, rhe control and 'trust' rhat is necessary for transactors to believe that engaging in rhe exchange will make them better off. The most prominent safeguard is che legal contract, which specifies rhe obligations of each party and allows a transaccor to go to a third party (i.e. a court) to sancrion an opportunistic trading partner.
The transaction cost analysis (TCA) framework argues rhat cost minimizacion explains structural decisions. Firms incernalize, that is, incegrare vertically, to reduce transaction costs. Transaction costs can be divided into different forms of costs related to the transac-tional relationship between buyer and seller. The underlying condition for the followingdescription of the cost elements is the equation:

Transaction cost = ex ante costs + ex post costs
  =   (search costs + contracting costs) +
      (monitoring costs + enforcement costs)

Ex ante costs

• Search costs include rhe cost of gathering information to identify and evaluate potential export intermediaries. Although such costs can be prohibicive to many exporters, knowledge about foreign markets is critical to export success. The search costs for distant, unfamiliar markets, where available (published) market informarion is lacking and organizarional forms are different, can be especially prohibitive (e.g. exports from the UK to China). In comparison, the search costs for nearby, familiar markets may be more acceptable (e.g. export from UK to Germany).
• Contracting costs refer ro the costs associated with negoriaring and writing an agreement between seller (producer) and buyer (export intermediary).

Ex post costs

• Monitoring costs refer ro the costs associated with monitoring rhe agreement co ensure that both seller and buyer fulfil rhe predetermined sec of obligations.
• Enforcement costs refer to rhe costs associated with the sanctioningof a crading partner who does not perform in accordance with the agreement.

A fundamental assumpcion of transaction cost theory is th ar firms will attempt to minimize the combination of these costs when undertaking transactions. Thus, when considering the most efficient form of organizing export functions, transaction cost theory suggests chat firms will choose rhe solution that minimizes the sum of ex ante and ex post costs.
Williamson (1975) based his analysis on the assumption of tninsaction costs and the different forms of governance struemre under which transactions take place. In his original work, Williamson identified two main alternatives of governance markets: externalizarion and internalizarion Chierarchiesy In the case of externalization, market transactions are by definirion external to rhe firm, and the price mechanism conveys all rhe necessary governance information. In rhe case of internalization, rhe international firm creates a kind of internal market in which the hierarchical governance is defined by a set of 'internal' contracts.
Externalizarion and internalizacion of transactions are equated with intermediaries (agents, distributors) and sales subsidiaries (or other governance structures involving ownership control), respectively.
In this way, Williamson framework provides the basis for a variety of research into the organization of international activity and the choice of international market entry mode. We will reuirn to rhis issue in Part ill of this book.
The conclusion of the transaction cost theory is:

Limitations of the TCA framework

Narrow assumptions of human nature

Ghosh al and Moran (1996) criricized the original work of Williamson as having overly narrow assumptions of human nature (opportunism and its equally narrow interpretation of economic objecrives). They also wondered why the theory's mainstream development has remained immune to such important contributions as Ouchfs (1980) insight on social control. Ouchi (1980) pointed ro rhe relevance of intermediate forms (between markets and hierarchies), such as rhe dan, where governance is based on a win-win siuiarion (in contrast to a zero-sum game situation).
Sometimes firms would even build trust with their externalized agents and distributors by turning them into parmers. In this way rhe firms would avoid large investments in subsidiaries around the world.

Excluding Internal1 transaction costs

The TCA framework also seems co ignore rhe MmernaF transaction cost, assuming zero friction within a mulunational firm. One can imagine severe friction (resulting in transaction cost) between the head office of a firm and its sales subsidiaries when internal transfer prices have to be settled.

Relevance of 'intermediate' forms for SMEs

One can also question rhe relevance of the TCA framework ro the internarionalization process of SMEs (Chriscensen and Lindmark, 1993). The lack of resources and knowledge in SMEs is a major force for the extern al izari on of activities. But since the use of markers often raises contractu al problems, markets in many instances are nor real akernatives co hierarchies for SMEs. Instead, rhe SMEs have to rely on intermediare forms of governance, such as contractual relations and relations based on clan*like systems created by a mutual orientation of investments, skills and rrusr-building. Therefore SMEs are often highly dependent on rhe cooperative environment available. Such an approach is presented and discussed in the next section on the network model.

Importance of production cost is understated

It can be argued that the importance of transaction cost is overstated and that the importance of production cost has nor been taken into consideration. Producrion cost is the cost of performing a particular task/function in the value chain, such as R&D costs, manufacturing costs and marketing costs. According to Williamson (1985), rhe most efficienc choice of internationalization mode is one that will help ro minimize the stmt of prod mo tion transaction costs.

3.4 The network model

Basic concept

Business networks are a mode of handling activity interdependences between several business actors. As we have seen, other modes of handling or governing interdependences in a business field are markets and hierarchies.
The network model differs from rhe marker with regard to relations between actors. In a marker model, actors have no specific relationships ro each other. The interdependences are regu la red through rhe market price mechanism. By contrast, in the business network the actors are linked co each other through exchange rdationships, and their needs and capabilities are mediated through the interaction raking place in the rdationships.
The industr ial network differs from the hierarchy in the way that rhe actors are autonomous and handle rheir interdependences bilaterally rather than via a coordinating unit on a higher level. Whereas a hierarchy is organized and controlled as one unit from the top, the business network is organized by each actor's willingness ro engage in exchange relationships with some of rhe other actors in rhe network. The networks are more loosely coupled than are hierarchies； they can change shape more easily. Any actor in rhe network can engage in new relationships or break off old ones, thereby modifying its structure. Thus business networks can be expected ro be more flexible in response to changing conditions in turbulent business fields, such as those where technical change is very rapid.
It can be concluded that business networks will emerge in fields where coordination between specific actors can give strong gains and where conditions are changing rapidly. Thus the network approach implies a move away from rhe firm as the unit of analysis, towards excha nge between firms and between a group of firms and other groups of firms as the main object of study. However, it also implies a move away from transactions towards more lasting exchange relationships constiruring a structure within which incer- nauonal business rakes place and evolves.
Evidently, business rehrionships and consequently industrial networks are subtle phenomena, which cannot easily be observed by an outsider： that is, a potential entrant. The actors are tied to each other through a number of different bonds, including technical, social, cognitive, administrative, legal and economic.
A basic assumption in the network model is that the individual firm is dependent on resources controlled by other firms. The companies get access to these external resources through their network positions. Since rhe development of posirions rakes rime and depends on resource accumulations, a firm must establish and develop positions in rda- tion to counterparts in foreign networks.
To enter a network from outside requires that other actors be motivated ro enga跃 in interaction, something that is resource-demanding and that may require several firms ro make adaptations in rheir ways of performing business. Thus foreign marker or network entry of rhe firm may very well be the result of interaction initiatives taken by other firms that are insiders in the network in the specific countr) However, the chances of being the object of such initiatives are much greater for an insider.
The networks in a country may well extend far beyond country borders. In rehrion to the internationalization of the firm, the network view argues chat the internationalizing firm is initially engaged in a network that is primarily domestic.
The relationships of a firm in a domestic network can be used as bridges co other networks in other countries. In some cases, the customer demands that rhe supplier follows it abroad if the supplier wants to keep the business at home. An example of an international network is shown in Figure 35. k appears that one of rhe subsuppliers established a subsidiary in counrry B. Here the production subsidiary is served by the local company of the subsupplier. Countries E and F, and partly country C, are sourced from the production subsidiary in country B. Generally it can be assumed chat direct or indirect bridges exist between firms and different counrry networks. Such bridges can be important both in the initial steps abroad and in the subsequent entry of new markets.
The character of the ties in a network is partly a matter of the firms involved. This is primarily the case with technical, economic and legal ties. To an important extent, however, the ties are formed between rhe people engaged in rhe business relationships, which is the case with social and cognitive ties. Industries as well as countries may differ with regard to the relative importance of firm and personal relationships. Bur it can be excepted that the personal influence on relationships is strongest in the early establishment of reh- t ionships. Later in the process, routines and systems will become more important.

When entering a network, the internationalization process of the firm will often proceed more quickly. In particular, SMEs in high-tech industries tend to go directly to more distant markets and to set up their own subsidiaries more rapidly. One reason seems to be rhar the entrepreneurs behind chose companies have networks of colleagues dealing with rhe new technology. Internauonalization, in these cases., is an exploitation of the advantage that this network constitutes.

3.5 Born globals

In recent years, research has identified an increasing number of firms that certainly do nor follow the traditional stages pattern in their internationalization process. By contrast, they aim at international markers, or possibly even the global market, right from their birth.
A born global can be defined as €a firm that from its inception pursues a vision of becoming global and globalizes rapidly without any preceding long-term domestic or internationalization period' (Oviatr and McDougall, 1994； Gabrielsson and Kirpalani, 2004).
Born gjobals represent an interesting case of firms operating under time and space compression conditions that hive allowed them to assume a global geographic scope from the moment of their start-up. This "time-space compression" phenomenon (Harvey, 1996) means that geographical processes can be reduced and compressed into 4here and now' trade and information exchange over the globe — if available infrastructure, communication and IT devices are put in place, together with skilled people. The global financial marker is a good example of the phenomenon (Tornroos, 2002).
Oviatt and McDoug;ill (1994) grouped born globals (or Unrernational new venrures, as they call them) into four different categories, dependent on the number of value chain activities performed combined with the number of countries involved. For example, they distinguish the fcexport/import start-up* from the "global srart-up" where the latter — in contrast with the former — involves many activities coordinated across many countries.

Born globals are typically characterized as SMEs with fewer than 500 employees, with annual sales under US$100 million — and with a reliance on cutting-edge technology in the development of relatively unique product or process innovations. The most distinguishing fearure of born global firms, however, is th ar they tend to be managed by entrepreneurial visionaries who view the world as a single, borderless marketplace from rhe time of the firm's founding. These small, technology-oriented companies operate in international markets from rhe earliest days of their establishment and there is growing evidence of the emergence of born global in numerous countries of the developed world.
More recently the concept of the born-again global firms has been proposed, i.e. longest abli shed firms that previously focused on their domesric markets but that suddenly embrace rapid and dedicated internationalization (Bell et al., 2001). The internationalization can be a result of critical events, such as a change in ownership and management, a takeover by another company or client followership, where a domestic customer internationalizes its operations by following its main customer ro foreign markets. The change in ownership can bri ng in new decision-makers with an interna non al focus. The acquisition can help the firm gain access to more financial resources, managerial capability, international market knowledge and rhe existing networks of the company taking it over (Kontinen and Ojala, 2012).
Furthermore, it seems that there can be true •bom globals (focusing on both low- and high-distance markets) and apparently born globals, that is boni intemationals9 which mainly focus on low-distance markets (Kuivalainen et al., 2007). A bom regional also starts international activities early and with significant incernarional shares, but its inter- nation al activities only take place in its home region, e.g. Europe, Asia or South America (Lopez et al., 2009).

Internet-based born globals are emerging

A very important trend in favour of born globals is the recent advance in communicat ions technology which has accelerated the speed of informa non flows. Gone are the days of large, vertically integrated firms where information flows were expensive and took a considerable u me to be shared. With the invention of the internet, e-mail and other rele- communicarion aids such as smartphones, iPads and other computer-supported technologies, managers of even small firms can manage operations efficiently across borders. Information is now readily and more quickly accessible co everyone. Everything is getting smaller and faster, allowing information to reach more people and places around the globe.
The internet revolution offers new opportunities for young SMEs to establish a global sales platform by developing e-commerce websites. Today many new and small firms are born globals in that they are 4start-ups' on rhe internet and f^ell to a global audience via a centralized e-conimerce website. A recent study of the born gjobals usage of international sales channels showed that born globals are relatively quick to adopt internetbased sales channels (Gabrielsson and Gabriels son, 2011). However, many of these firms not only rely on inter net-based channels, bur ako use combinations of conventional channels and rhe internet. For example in the case of hybrid sales channels, the channel functions are shared between rhe producer and rhe middleman, using rhe internet to inregrare rhe activities. Customers and sales leads may be generated by internet-based promotion, but the actual product fulfilment (handling of stocks, distribution control and other reselling/recailing functions) is the responsibility of rhe 'physical' intermediaries.
The implenientarion of hybrid sales channels has to be handled with care in order to avoid channel conflicts.

Born globals are challenging traditional theories

Born globals may be simihr to rhe Mate start er' or rhe "inter national among others' (Johanson and Mattson, 1988). In the latter siniarion, both the environment and the firm are highly inrcrnationalized. Johanson and Mattson (1988) pointed our that internation- alizanon processes of firms will be much faster in internationalized market conditions, because, among other reasons, the need for coord in at ion and integration across borders is high. Since relevant partners/discriburors will often be occupied in neighbouring markets, firms do nor necessarily follow a 'rings in the water' approach to market selection. In the same vein, their 'establishment chain' need not follow the cradirional picture because strategic alliances, joint venrures and rhe like are much more prevalent; firms seek partners with supplementary skills and resources. In other words, internauonalization processes of firms will be much more individual and siuiation-specific in internationalized markets.
Many industries are characterized by global sourcing activities and also by networks across borders. The consequence is that innovarive products can very quickly spread to new markets all over the world — because the needs and wants of buyers are becoming more homogeneous. Hence the i nre rn ar io na li zar i on process of subcontractors may be quite diverse and different from the stages models. In other words, rhe new market conditions pull the firms into many markets very quickly. Finally, financial markets have also become international, which means char entrepreneurs can seek financial sources all over the world.
Cavusgil and Knight (2015) conclude that the born global firms are often driven by change agents (founders and employees) who iniriare the first export sales. It can be argued that the background of the decision-maker (founder) has a big influence on rhe inrernacionaIizarion path followed (Freeman and Cavusgil, 2007； Hagen and Zuchella, 2014). Market knowledge, personal networking of the entrepreneur and international contacts and experience transmitted from former occuparions^ rehrions and education are examples of such international skills obtained prior to rhe birth of the firm. Factors such as education, experience of living abroad, experience of other internationally oriented jobs, and so on mould the mind of the founder and decrease the psychic distances ro specific product markets significantly； the previous experience and knowledge of the founder extend the network across narional borders, opening up possibilities for new business ventures (Madsen and Servais, 1997).
Often born globak govern their sales and marketing activities through a specialized network in which they seek partners that complement their own competences; this is necessary because of their limited resources.
In many ways the slow organic (Uppsala model) process and the accelerated born global pathways are opposites, at the two extremes of a spectrum (see Figure 3.6). They also often represent the choice of doing ir alone (the organic pathway), while the born global pathway is based on different types of cooperation and partnerships in order to facilitate rapid growth and internationalization.

In spite of the different time-frames and prerequisites for the pathways, there are also some common characteristics in all models. Inter nationalization is seen as a process where knowledge, learning and commitment go hand in hand, even when ic is rapid. Past knowledge and experience contribute to current knowledge of the company Qohanson and Marrin, 2015). Firms aiming for rhe born global pathway do nor have rime to develop these skills in an organic way (inside the firm) — they need ro possess them beforehand or acquire them aJong the way, i.e. through collaborating with other firms that already possess these supplementary competences.
Born globals must often choose a business area with homogeneous and minimal adaptation of rhe marketing mix. The argument is that these small firms cannot rake a multidomestic approach as can large firms, simply because they do nor have sufficient scale in operations worldwide. They are vulnerable because they are dependent on a single product (niche marker) that they have to commercialize in lead markets first, no matter where such markets are situated geographically. The reason is chat such markets are rhe key to broad and rapid market access, which is important because these firms often incur reh- rively high fixed R&D costs, which occur 'up front' i.e. before any sales are made. Since this is the key factor influencing rhe choice of the inicial market, the importance of psychic distance as a market selection criterion is reduced. In order ro survive, firms must quickly catch rhe growth track ro cover the initial expenses. Finally, competition for a typical born global is very intense and its products may become obsolete rather quickly (e.g. in the case of software). If a company is ro take full advantage of the market potential during its 'global window of opportunity', it may be forced ro penetrate all major markers simultaneously (Aijo el aLf 2005).
More recent studies (e.g.Trudgpn and Freeman, 2014) propose that some born globals initially select psychically proximate markets for the purpose of risk reduction, but are then able to utilize technical expertise, networks and entrepreneurial skill to move very quickly to psychically distant markers with more opportunities.

3.6 Summary

The main conclusions of this chapter are summarized in Table 3.1.
Born globals represent a relatively new research field in international marketing. They share some fundamental similarities： they possess unique assets, focus on narrow global market segments, are strongly cusromer-orienred, and rhe enrrepreneur's vision and competences are of crucial importance. In rhe end, for these firms, being global does nor seem to be an option but a necessity. They are pushed into globalization by global customers and national/regional market segments that are too small. They can sustain their immediate global reach thanks to entrepreneurial vision and comperesces, and a deep awareness and knowledge of rheir comperiuve advantage in foreign markets.

Questions for discussion

1. Explain why internarionalizarion is an ongoing process in constant need of evaluation.
2. Explain the main differences between rhe three theories of internanonalizacion: rhe Uppsala model, the transaction cost theory and rhe network model.
3. What is meant by rhe concept of 'psycholc印cd' or 'psychic' distance?

References