Toward an eclectic theory of international production: some empirical tests
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 possesses (or can 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.
A firm must possess additional ownership advantages sufficient to outweigh the costs of servicing an
unfamiliar or distant environment (Hirsch 1976).
Inputs are of two kinds. The first are those which are available, on the same terms, to all firms, but
which are specific in their origin to particular locations and have to be used in that location. These
include not only Ricardian type endowments- natural resources, most kinds of labour, and proximity
to markets, but also the legal and commercial environment in which the endowments are used-
market structure, and government legislation and policies.
In classical and neoclassical trade theories, differences in possession of these endowments between
countries fully explain the willingness and the ability of enterprises to become international.
The second type of input is that which an enterprise may create for itself- or can purchase from other
institutions, but over which, in so doing, it acquires some proprietary right of use. It should be
observed that these ownership advantages are not exclusive either to international or multinational
firms.
The essential feature about these second types of inputs is that, although their origin may be linked
to location-specific endowments, their use is not so confined.
Only if both of the right dispositions of resource endowments (location and ownership) exist
between countries and firms of different nationalities will international production take place.
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.
,One ownership variable, the skilled employment ratio, and two location variables, relative market
shares and average hourly compensation are consistently significant at the 99 percent level. Relative
export shares and relative wages appear significant at the 95 percent level in some of the equations,
but only where there are few independent variables regressed together. This suggest that these
latter two location variables exert some influence on the competitiveness of U.S. trade but not on
that of foreign production. The tariff variable appears to be a significant explanation of the overall
involvement of U.S. firms in the five countries.
Quite different variables explain most of the form of penetration from those which explain the first
three variables. The profitability ratio and the growth in sales per man are consistently significant.
Other variables which are occasionally significant are two ownership variables, average hourly
compensation and relative sales per man. They are only significant in small groups.
Mexico and Brasil were excluded because the results were less significant. Probably the variables
were more appropriate for mature industries.
The internationalization process of the firm—A model of knowledge
management development and increasing foreign market commitments
There are two directions of internationalization we distinguish: increasing involvement of the firm in
the individual foreign country, and successive establishment of operations in new countries. In this
paper we will, however, concentrate on the extension of operations in individual markets.
We believe that internationalization is the product of a series of incremental decisions. Our aim is to
identify elements shared in common by the successive decision situations and to develop thereby a
model of the internationalization process which will have explanatory value.
,Of particular interest in the present context is that the time order of establishments of operations in
new countries seems to be related to the physic distance between the home and the import/host
countries. The physic distance is defined as the sum of factors preventing the flow of information
from and to the market.
In no case has a firm (from Sweden) started production in a country without having sold in the
country via an agency or a sales subsidiary before. However, this gradual internationalization is not
exclusively a Swedish phenomenon.
We see internationalization as the consequence of a 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.
The model assumes that the state of internationalization affects perceived opportunities and risks
which in turn influence commitment decisions and current activities.
The two state aspects are resources committed to foreign markets - market commitment - and
knowledge about foreign markets possessed by the firm at a given point of time.
We assume the market commitment is composed of two factors- the amount of resources
committed and the degree of commitment, that is, the difficulty of finding an alternative use for the
resources and transferring them to it. Vertical integration means a higher degree of commitment
than a conglomerative foreign investment.
In our model, knowledge is of interest because commitment decisions are based on several kinds of
knowledge.
An important aspect of experiential knowledge is that it provides the framework for perceiving and
formulating opportunities.
The change aspects we have considered are current activities and decisions to commit resources to
foreign operations.
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. We assume
that decisions are made in response to perceived problems and/or opportunities on the market.
We distinguish between an economic effect and an uncertainty effect of each additional
commitment.
, Increases in market uncertainty due to political changes cannot be expected to lead to uncertainty-
reducing commitments discussed here since such commitments cannot be expected to affect the
political situation.
Toward a theory of international new ventures
Entrepreneurship research first focused on international issues with the impact of public policies on
small firm exporting, entrepreneurs and entrepreneurial activities in various countries, and
comparisons between small-firm exporters and non-exporters. The age of an organization when it
internationalizes has been considered infrequently.
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
a strong network, and a tightly managed organization focused on international sales growth.
We define an international new venture as a business organization that, from inception, seeks to
derive significant competitive advantage from the use of resources and the sale of outputs in
multiple countries. Foreign direct investment is not a requirement.
Sullivan and Bauwerschmidt (1990) found that a firm's stage of international involvement was an
unexpectedly poor predictor of European managers' knowledge and beliefs.
First, firms with large resources are expected to take large steps toward internationalization. Second,
when foreign market conditions are stable and homogeneous, learning about them is easier. Third,
when firms have considerable experience with markets that are similar to a newly targeted foreign
market, previous experience may be generalizable to the new arena. Yet none of the exceptions
seem to apply to international new ventures. Several of the international new ventures we have
studied appear to contribute to industry volatility. Therefore, according to Johansen and Vahlne's
(1990) own standard, stage theory needs more than a minor adjustment.
Elemental sources of advantage, like competitive advantage, make international new ventures
possible.
The foundation of the theoretical framework that we propose is traditional in its reliance on
transaction cost analysis, market imperfections, and the international internalization of essential
transactions to explain the existence of the MNE.
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 possesses (or can 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.
A firm must possess additional ownership advantages sufficient to outweigh the costs of servicing an
unfamiliar or distant environment (Hirsch 1976).
Inputs are of two kinds. The first are those which are available, on the same terms, to all firms, but
which are specific in their origin to particular locations and have to be used in that location. These
include not only Ricardian type endowments- natural resources, most kinds of labour, and proximity
to markets, but also the legal and commercial environment in which the endowments are used-
market structure, and government legislation and policies.
In classical and neoclassical trade theories, differences in possession of these endowments between
countries fully explain the willingness and the ability of enterprises to become international.
The second type of input is that which an enterprise may create for itself- or can purchase from other
institutions, but over which, in so doing, it acquires some proprietary right of use. It should be
observed that these ownership advantages are not exclusive either to international or multinational
firms.
The essential feature about these second types of inputs is that, although their origin may be linked
to location-specific endowments, their use is not so confined.
Only if both of the right dispositions of resource endowments (location and ownership) exist
between countries and firms of different nationalities will international production take place.
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.
,One ownership variable, the skilled employment ratio, and two location variables, relative market
shares and average hourly compensation are consistently significant at the 99 percent level. Relative
export shares and relative wages appear significant at the 95 percent level in some of the equations,
but only where there are few independent variables regressed together. This suggest that these
latter two location variables exert some influence on the competitiveness of U.S. trade but not on
that of foreign production. The tariff variable appears to be a significant explanation of the overall
involvement of U.S. firms in the five countries.
Quite different variables explain most of the form of penetration from those which explain the first
three variables. The profitability ratio and the growth in sales per man are consistently significant.
Other variables which are occasionally significant are two ownership variables, average hourly
compensation and relative sales per man. They are only significant in small groups.
Mexico and Brasil were excluded because the results were less significant. Probably the variables
were more appropriate for mature industries.
The internationalization process of the firm—A model of knowledge
management development and increasing foreign market commitments
There are two directions of internationalization we distinguish: increasing involvement of the firm in
the individual foreign country, and successive establishment of operations in new countries. In this
paper we will, however, concentrate on the extension of operations in individual markets.
We believe that internationalization is the product of a series of incremental decisions. Our aim is to
identify elements shared in common by the successive decision situations and to develop thereby a
model of the internationalization process which will have explanatory value.
,Of particular interest in the present context is that the time order of establishments of operations in
new countries seems to be related to the physic distance between the home and the import/host
countries. The physic distance is defined as the sum of factors preventing the flow of information
from and to the market.
In no case has a firm (from Sweden) started production in a country without having sold in the
country via an agency or a sales subsidiary before. However, this gradual internationalization is not
exclusively a Swedish phenomenon.
We see internationalization as the consequence of a 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.
The model assumes that the state of internationalization affects perceived opportunities and risks
which in turn influence commitment decisions and current activities.
The two state aspects are resources committed to foreign markets - market commitment - and
knowledge about foreign markets possessed by the firm at a given point of time.
We assume the market commitment is composed of two factors- the amount of resources
committed and the degree of commitment, that is, the difficulty of finding an alternative use for the
resources and transferring them to it. Vertical integration means a higher degree of commitment
than a conglomerative foreign investment.
In our model, knowledge is of interest because commitment decisions are based on several kinds of
knowledge.
An important aspect of experiential knowledge is that it provides the framework for perceiving and
formulating opportunities.
The change aspects we have considered are current activities and decisions to commit resources to
foreign operations.
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. We assume
that decisions are made in response to perceived problems and/or opportunities on the market.
We distinguish between an economic effect and an uncertainty effect of each additional
commitment.
, Increases in market uncertainty due to political changes cannot be expected to lead to uncertainty-
reducing commitments discussed here since such commitments cannot be expected to affect the
political situation.
Toward a theory of international new ventures
Entrepreneurship research first focused on international issues with the impact of public policies on
small firm exporting, entrepreneurs and entrepreneurial activities in various countries, and
comparisons between small-firm exporters and non-exporters. The age of an organization when it
internationalizes has been considered infrequently.
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
a strong network, and a tightly managed organization focused on international sales growth.
We define an international new venture as a business organization that, from inception, seeks to
derive significant competitive advantage from the use of resources and the sale of outputs in
multiple countries. Foreign direct investment is not a requirement.
Sullivan and Bauwerschmidt (1990) found that a firm's stage of international involvement was an
unexpectedly poor predictor of European managers' knowledge and beliefs.
First, firms with large resources are expected to take large steps toward internationalization. Second,
when foreign market conditions are stable and homogeneous, learning about them is easier. Third,
when firms have considerable experience with markets that are similar to a newly targeted foreign
market, previous experience may be generalizable to the new arena. Yet none of the exceptions
seem to apply to international new ventures. Several of the international new ventures we have
studied appear to contribute to industry volatility. Therefore, according to Johansen and Vahlne's
(1990) own standard, stage theory needs more than a minor adjustment.
Elemental sources of advantage, like competitive advantage, make international new ventures
possible.
The foundation of the theoretical framework that we propose is traditional in its reliance on
transaction cost analysis, market imperfections, and the international internalization of essential
transactions to explain the existence of the MNE.
