Why companies internationalize

Gabriel R. G. Benito, Irina Surdu, Henrich R. Greve

Most companies never expand outside their home markets. What drives the ones that do?

Firms can be understood as coalitions of stakeholders, each with their own goals and expectations. Shareholders differ from management, and customers want different things than employees.

This means that companies do not actively optimize their operations to reach one single stable objective. Rather, they try to reach adequate levels on a constantly changing list of ambitions.

Profitability and market share are usually the most important goals. If a Norwegian company believes it has competitive advantages in Germany, that may be reason enough to expand. Especially if profits in Norway are declining.

There are however cases where this explanation is not good enough. Currently, Chinese consumer electronics companies seek to enter the U.S. market, even though it is highly saturated and there is significant risk involved.

Chinese companies must spend time and resources on adapting to local regulations, overcoming trade barriers, and managing their reputation in overseas markets. As recent conflicts over Huawei demonstrate.

Keeping up with the Joneses

In setting goals and evaluating performance, firms look at competitors and at their own past performance.

Internationalization may become a goal simply because top managers see their competitors doing it. Especially because international expansion is associated with a range of positive outcomes such as enhanced reputation for the firm and individual decision makers.

Chinese consumer electronic companies have an overarching goal of becoming global like their developed market counterparts such as Apple or Samsung. They associate globalness with operating in the U.S. market, and pursue this even though it weakens overall profitability.

Location, location, location

Companies often expand to markets similar to their home markets. They may thus be highly international, but with a limited geographical footprint. For example, the Norwegian consumer goods company Orkla markets its products in over 100 countries, but revenue is highly concentrated in Northern Europe.

Norwegian firms seeking low-cost locations for their manufacturing may have to search far away simply because nearby nations have high costs.

Still, even when the initial location is far away, firms tend to favor countries near the initial entry when expanding further. As the Norwegian telecom company Telenor has done in Asia, for example.

Nevertheless, location choices are idiosyncratic and there is evidence that companies make decisions based on remarkably simple sources of information, such as media coverage unrelated to the business opportunities of the location.

Different companies have different strengths

Success in entering a foreign market depends on a company’s ability to unpack the lessons learned from its own past experiences and the experiences of peer companies and developing them into routines.

Here there are large differences between companies. Traditional Western multinationals such as General Electric or Unilever have developed significant knowledge and experience over time that they can draw on.

Emerging market multinationals and firms that internationalize fast (so-called born globals) may lack such rich pools of knowledge, but they can make up for it by being more flexible organizations, which are less set in their ways of operating.

In particular, born globals such as Spotify or Google are less likely to suffer from learning myopia and may be more willing and able to change organizational practices and strategies in order to succeed in international expansion.

Source: Surdu, I., Greve, H.R. & Benito, G.R.G. Back to basics: Behavioral theory and internationalization. J Int Bus Stud (2020). https://doi.org/10.1057/s41267-020-00388-w

Published 6. May 2021

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