1. Toward an eclectic theory of international production: some empirical
tests
John H. Dunning (1980)
There is now a consensus of opinion that the propensity of an enterprise to engage in
international production-that financed by foreign direct investment rests on three main
determinants: first, the extent to which it an acquire assets which its competitors do not
possess; second, whether it is in its interest to sell or lease these assets to other firms, or
make use of-internalize-them itself; and third, how far it is profitable to exploit these assets in
conjunction with the indigenous resources of foreign countries rather than those of the home
country. The more the ownership-specific advantages possessed by an enterprise, the
greater the inducement to internalize them; and the wider the attractions of a foreign rather
than a home country production base, the greater the likelihood that an enterprise, given the
incentive to do so, will engage in international production. Yet, it must possess additional
ownership advantages sufficient to outweigh the costs of servicing an unfamiliar or distant
environment.
Eclectic theory suggest that the enterprise becomes an international enterprise when it
services foreign markets. However, for it to be able to produce alongside homegrown firms
domiciled in these markets, it must possess additional ownership advantages sufficient to
outweigh the costs of servicing an unfamiliar or distant environment.
The function of an enterprise is to transform, by the process of production, valuable
inputs into more valuable outputs. Inputs are of two kinds. Firstly, in classical and
neoclassical trade theories, differences in the possession of resource endowments between
countries fully explain the willingness and the ability of enterprises to become international
(location advantage). Secondly, input which an enterprise creates for itself (technology/
organizational skills). Ownership-specific inputs take the form of a legally protected right
patents, brand names, trademarks, the acquisition of a particular raw material essential to
the production of the product, technical characteristics of firms-economies of large-scale
production and surplus entrepreneurial capacity. Ownership advantages are often derived
from location specific environments. Home countries of MNEs often given rise to the
ownership advantages in the first place. Many of today’s ownership advantages of firms are
a reflection of yesterday’s location advantages of countries. Ownership advantages are worth
separating from those which are location-specific, because the enterprise possessing them
can exploit them wherever it wishes, usually at a minimal transfer cost. Only if both of the
right dispositions of resource endowments (exist between countries and firms of different
nationalities) will international production take place.
The basic incentive of a firm to internalize its ownership endowments is to avoid the
disadvantages, or capitalize on the imperfections, of one or the other of the two main
external mechanisms of resource allocation-the market or price system and the public
authority fiat. Market imperfections arise wherever negotiation or transaction costs are high,
wherever the economies of interdependent activities cannot be fully captured, and wherever
information about the product or service being marketed is not readily available or is costly to
acquire. Public intervention in the allocation of resources may also encourage firms to
internalize their activities. This arises particularly with respect to government legislation
toward the production and licensing of technology, including the patent system, and where
there are differential tax and exchange rate policies, which multinational enterprises may
wish either to avoid or exploit. As described then, the propensity to internalize ownership or
location advantages make up the third strand in the eclectic theory (advantages which rise
from internalizing).
,2. The internationalization process of the firm – a model of knowledge
development and increasing foreign market commitments
Jan Johanson & Jan-Erik Valhne (1997)
Introduction
The basic assumptions of the internalization process model are that lack of such knowledge
is an important obstacle to the development of international operations and that the
necessary knowledge can be acquired mainly through operations abroad. This holds for the
two directions of internationalization we distinguish: increasing involvement of the firm in the
individual foreign country, and successive establishment of operations in new countries.
Empirical background
We believe that internationalization is the product of a series of incremental decisions.
Empirical research shows that Swedish firms often develop their international operation in
small steps, rather than by making large foreign production investments at single points in
time. Typically, firms start exporting to a country via an agent, later establish a sales
subsidiary and eventually in some cases, begin production in the host country.
We have also observed a similar successive establishment of operations in new countries.
Of particular interest in the present context is that the time order of such establishments
seems to be related to the psychic distance between the home and the import/host countries.
The psychic distance is defined as the 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.
On its part exporting is a means also of reducing costs of market development. Even if
investment is necessary in the future, exporting helps to determine the nature and size of the
market. As the market develops, warehouse facilities are established: later sales branches
and subsidiaries. The record of company development indicates that the use of selling
subsidiaries at an early stage reduced the later risks of manufacturing abroad. These selling
affiliates permitted the slow development of manufacturing from repairing, to packaging, to
mixing, to finishing, to processing or assembling operations, and finally to full manufacture.
Specification of the problem
We see the pattern described as the consequence of process of incremental adjustments to
changing conditions of the firm and its environment. That internationalization decisions have
an incremental character is, we feel, largely due to this lack of market information and the
uncertainty occasioned thereby. We believe that lack of knowledge due to differences
between countries with regard to, for example, language and culture, is an important
obstacle to decision making connected with the development of international operations.
The internationalization model
The present stat of internationalization is one important factor explaining the course of
following internationalization. The state aspects we consider are the resource commitment to
the foreign markets - market commitment -and knowledge about foreign markets and
operations. The change aspects are decisions to commit resources and the performance of
current business activities.
,Market knowledge and market commitment are assumed to affect both commitment
decisions and the way current activities are performed. These in turn change knowledge and
commitment. The model assumes that the state of internationalization affects perceived
opportunities and risks which in turn influence commitment decisions and current activities.
Market commitment
Market commitment is composed of two factors – the amount of resources committed (size of
the investment) and the degree of commitment (the difficulty of finding an alternative use for
the resources and transferring them to). The degree of commitment is higher the more the
resources in question are integrated with other parts of the firm and their value is derived
from these integrated activities. Thus, as a rule, vertical integration means a higher degree of
commitment than a conglomerative foreign investment. An example of resources that cannot
easily be directed to another market or used for other purposes is a marketing organization
that is specialized around the products of the firm and has established integrated customer
relations. The more specialized the resources are to the specific market, the grater is the
degree of commitment.
Market knowledge
Commitment decisions are based on several kinds of knowledge.
Knowledge of opportunities or problems;
Evaluation of alternatives is based on some knowledge about relevant parts of the
market environment and about performance of various activities;
Experiential knowledge. In foreign operation it must be gained successively during
the operations in the country (concrete opportunities);
General knowledge and market specific knowledge.
There is a direct relation between market knowledge and market commitment. Knowledge
can be considered a resource(or, perhaps preferably, a dimension of the human
resources),and consequently the better the knowledge about a market, the more valuable
are the resources and the stronger is the commitment to the market. This is especially true of
experiential knowledge, which is usually associated with the particular conditions on the
marketing question and thus cannot be transferred to other individuals or other markets.
Current business activities
The more complicated and the more differentiated the product, the larger the total
commitment as a consequence of current activities will come to be. Current activities are also
the prime source of market and firm experience. Market experience is in many cases not for
sale and has to be acquired through a long learning process.
, Commitment decisions
The second change aspect is decisions to commit resources to foreign operations. We
assume that such decisions depend on what decision alternatives are raised and how they
are chosen. Regarding the first part we assume that decisions are made in response to
perceived problems and/or opportunities on the market. Whether decision alternatives are
raised in response to problems or in response to opportunities, they will be related to the
operations currently performed on the market. Alternative solutions will generally consist of
activities that mean an extension of the boundaries of the organization and an increase in
commitment to the market. We distinguish between an economic effect and an uncertainty
effect of each additional commitment. We assume that the economic effect is associated
primarily with increases in the scale of Operations on the market, and that the uncertainty
effect concerns the market uncertainty, that is the decision-makers' perceived lack of ability
to estimate the present and future market and market-influencing factors. We mean that this
market uncertainty is reduced through increases in interaction and integration with the
market environment.
The firm will incrementally extend its scale of existing operations on the market – in
expectation of large returns – until its tolerable risk frontier is met. Scale-increasing
commitments may be occasioned by a decline in uncertainty about the market incidental to
gaining market knowledge acquired with experience. Scale-increasing commitments may
also follow a rise of the maximum tolerable risk level due to an increase in the total resources
of the firm or a more aggressive approach toward risk.
To reduce uncertainty, the firm will take steps to increase interactions and integration with
the market environment. An increase in the existing risk situation on the market may be
occasioned by an increase in market commitment or market uncertainty. Market
commitments that increase risks are those that increase the scale of existing operations on
the market.
3. Toward a Theory of International New Ventures
Oviatt, B.M. and McDougall, P.P. (1994)
Introduction
Since 1989, report based on case studies of international new ventures have begun to
appear from scholars of entrepreneurship. Some have shown that such ventures from
because internationally experienced and alert entrepreneurs are able to link resources from
multiple countries to meet the demand of markets that are inherently international. Other
case studies have shown that the success of international new ventures seems to depend on
having an international vision of the firm from inception, an innovative product or service
marketed through strong network and a tightly managed organization focused on
international sales growth. International new ventures may appear in a wide range of
industries.
A definition of international new ventures
We define an international new venture as a business organization that, from inception
(observable resource commitments), seeks to derive significant competitive advantage from
the use of resources and the sale of outputs in multiple countries. The distinguishing feature
of these start-ups is that their origins are international, as demonstrated by observable and
significant commitments of resources (e.g., material, people, financing, time) in more than
one nation. The focus here is on the age of firms when they become international, not on
their size. In contrast to organizations that evolve gradually from domestic firms to MNEs,
these new ventures begin with a proactive international strategy. However, they do not
tests
John H. Dunning (1980)
There is now a consensus of opinion that the propensity of an enterprise to engage in
international production-that financed by foreign direct investment rests on three main
determinants: first, the extent to which it an acquire assets which its competitors do not
possess; second, whether it is in its interest to sell or lease these assets to other firms, or
make use of-internalize-them itself; and third, how far it is profitable to exploit these assets in
conjunction with the indigenous resources of foreign countries rather than those of the home
country. The more the ownership-specific advantages possessed by an enterprise, the
greater the inducement to internalize them; and the wider the attractions of a foreign rather
than a home country production base, the greater the likelihood that an enterprise, given the
incentive to do so, will engage in international production. Yet, it must possess additional
ownership advantages sufficient to outweigh the costs of servicing an unfamiliar or distant
environment.
Eclectic theory suggest that the enterprise becomes an international enterprise when it
services foreign markets. However, for it to be able to produce alongside homegrown firms
domiciled in these markets, it must possess additional ownership advantages sufficient to
outweigh the costs of servicing an unfamiliar or distant environment.
The function of an enterprise is to transform, by the process of production, valuable
inputs into more valuable outputs. Inputs are of two kinds. Firstly, in classical and
neoclassical trade theories, differences in the possession of resource endowments between
countries fully explain the willingness and the ability of enterprises to become international
(location advantage). Secondly, input which an enterprise creates for itself (technology/
organizational skills). Ownership-specific inputs take the form of a legally protected right
patents, brand names, trademarks, the acquisition of a particular raw material essential to
the production of the product, technical characteristics of firms-economies of large-scale
production and surplus entrepreneurial capacity. Ownership advantages are often derived
from location specific environments. Home countries of MNEs often given rise to the
ownership advantages in the first place. Many of today’s ownership advantages of firms are
a reflection of yesterday’s location advantages of countries. Ownership advantages are worth
separating from those which are location-specific, because the enterprise possessing them
can exploit them wherever it wishes, usually at a minimal transfer cost. Only if both of the
right dispositions of resource endowments (exist between countries and firms of different
nationalities) will international production take place.
The basic incentive of a firm to internalize its ownership endowments is to avoid the
disadvantages, or capitalize on the imperfections, of one or the other of the two main
external mechanisms of resource allocation-the market or price system and the public
authority fiat. Market imperfections arise wherever negotiation or transaction costs are high,
wherever the economies of interdependent activities cannot be fully captured, and wherever
information about the product or service being marketed is not readily available or is costly to
acquire. Public intervention in the allocation of resources may also encourage firms to
internalize their activities. This arises particularly with respect to government legislation
toward the production and licensing of technology, including the patent system, and where
there are differential tax and exchange rate policies, which multinational enterprises may
wish either to avoid or exploit. As described then, the propensity to internalize ownership or
location advantages make up the third strand in the eclectic theory (advantages which rise
from internalizing).
,2. The internationalization process of the firm – a model of knowledge
development and increasing foreign market commitments
Jan Johanson & Jan-Erik Valhne (1997)
Introduction
The basic assumptions of the internalization process model are that lack of such knowledge
is an important obstacle to the development of international operations and that the
necessary knowledge can be acquired mainly through operations abroad. This holds for the
two directions of internationalization we distinguish: increasing involvement of the firm in the
individual foreign country, and successive establishment of operations in new countries.
Empirical background
We believe that internationalization is the product of a series of incremental decisions.
Empirical research shows that Swedish firms often develop their international operation in
small steps, rather than by making large foreign production investments at single points in
time. Typically, firms start exporting to a country via an agent, later establish a sales
subsidiary and eventually in some cases, begin production in the host country.
We have also observed a similar successive establishment of operations in new countries.
Of particular interest in the present context is that the time order of such establishments
seems to be related to the psychic distance between the home and the import/host countries.
The psychic distance is defined as the 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.
On its part exporting is a means also of reducing costs of market development. Even if
investment is necessary in the future, exporting helps to determine the nature and size of the
market. As the market develops, warehouse facilities are established: later sales branches
and subsidiaries. The record of company development indicates that the use of selling
subsidiaries at an early stage reduced the later risks of manufacturing abroad. These selling
affiliates permitted the slow development of manufacturing from repairing, to packaging, to
mixing, to finishing, to processing or assembling operations, and finally to full manufacture.
Specification of the problem
We see the pattern described as the consequence of process of incremental adjustments to
changing conditions of the firm and its environment. That internationalization decisions have
an incremental character is, we feel, largely due to this lack of market information and the
uncertainty occasioned thereby. We believe that lack of knowledge due to differences
between countries with regard to, for example, language and culture, is an important
obstacle to decision making connected with the development of international operations.
The internationalization model
The present stat of internationalization is one important factor explaining the course of
following internationalization. The state aspects we consider are the resource commitment to
the foreign markets - market commitment -and knowledge about foreign markets and
operations. The change aspects are decisions to commit resources and the performance of
current business activities.
,Market knowledge and market commitment are assumed to affect both commitment
decisions and the way current activities are performed. These in turn change knowledge and
commitment. The model assumes that the state of internationalization affects perceived
opportunities and risks which in turn influence commitment decisions and current activities.
Market commitment
Market commitment is composed of two factors – the amount of resources committed (size of
the investment) and the degree of commitment (the difficulty of finding an alternative use for
the resources and transferring them to). The degree of commitment is higher the more the
resources in question are integrated with other parts of the firm and their value is derived
from these integrated activities. Thus, as a rule, vertical integration means a higher degree of
commitment than a conglomerative foreign investment. An example of resources that cannot
easily be directed to another market or used for other purposes is a marketing organization
that is specialized around the products of the firm and has established integrated customer
relations. The more specialized the resources are to the specific market, the grater is the
degree of commitment.
Market knowledge
Commitment decisions are based on several kinds of knowledge.
Knowledge of opportunities or problems;
Evaluation of alternatives is based on some knowledge about relevant parts of the
market environment and about performance of various activities;
Experiential knowledge. In foreign operation it must be gained successively during
the operations in the country (concrete opportunities);
General knowledge and market specific knowledge.
There is a direct relation between market knowledge and market commitment. Knowledge
can be considered a resource(or, perhaps preferably, a dimension of the human
resources),and consequently the better the knowledge about a market, the more valuable
are the resources and the stronger is the commitment to the market. This is especially true of
experiential knowledge, which is usually associated with the particular conditions on the
marketing question and thus cannot be transferred to other individuals or other markets.
Current business activities
The more complicated and the more differentiated the product, the larger the total
commitment as a consequence of current activities will come to be. Current activities are also
the prime source of market and firm experience. Market experience is in many cases not for
sale and has to be acquired through a long learning process.
, Commitment decisions
The second change aspect is decisions to commit resources to foreign operations. We
assume that such decisions depend on what decision alternatives are raised and how they
are chosen. Regarding the first part we assume that decisions are made in response to
perceived problems and/or opportunities on the market. Whether decision alternatives are
raised in response to problems or in response to opportunities, they will be related to the
operations currently performed on the market. Alternative solutions will generally consist of
activities that mean an extension of the boundaries of the organization and an increase in
commitment to the market. We distinguish between an economic effect and an uncertainty
effect of each additional commitment. We assume that the economic effect is associated
primarily with increases in the scale of Operations on the market, and that the uncertainty
effect concerns the market uncertainty, that is the decision-makers' perceived lack of ability
to estimate the present and future market and market-influencing factors. We mean that this
market uncertainty is reduced through increases in interaction and integration with the
market environment.
The firm will incrementally extend its scale of existing operations on the market – in
expectation of large returns – until its tolerable risk frontier is met. Scale-increasing
commitments may be occasioned by a decline in uncertainty about the market incidental to
gaining market knowledge acquired with experience. Scale-increasing commitments may
also follow a rise of the maximum tolerable risk level due to an increase in the total resources
of the firm or a more aggressive approach toward risk.
To reduce uncertainty, the firm will take steps to increase interactions and integration with
the market environment. An increase in the existing risk situation on the market may be
occasioned by an increase in market commitment or market uncertainty. Market
commitments that increase risks are those that increase the scale of existing operations on
the market.
3. Toward a Theory of International New Ventures
Oviatt, B.M. and McDougall, P.P. (1994)
Introduction
Since 1989, report based on case studies of international new ventures have begun to
appear from scholars of entrepreneurship. Some have shown that such ventures from
because internationally experienced and alert entrepreneurs are able to link resources from
multiple countries to meet the demand of markets that are inherently international. Other
case studies have shown that the success of international new ventures seems to depend on
having an international vision of the firm from inception, an innovative product or service
marketed through strong network and a tightly managed organization focused on
international sales growth. International new ventures may appear in a wide range of
industries.
A definition of international new ventures
We define an international new venture as a business organization that, from inception
(observable resource commitments), seeks to derive significant competitive advantage from
the use of resources and the sale of outputs in multiple countries. The distinguishing feature
of these start-ups is that their origins are international, as demonstrated by observable and
significant commitments of resources (e.g., material, people, financing, time) in more than
one nation. The focus here is on the age of firms when they become international, not on
their size. In contrast to organizations that evolve gradually from domestic firms to MNEs,
these new ventures begin with a proactive international strategy. However, they do not
