ASSIGNMENT

1. Give 4 examples of theories of internationalization?

Internationalization Theory

Internalization theory focuses on imperfections in intermediate product markets. Two main kinds of
intermediate product are distinguished: knowledge flows linking research and development (R&D) to
production, and flows of components and raw materials from an upstream production facility to a
downstream one. Most applications of the theory focus on knowledge flow.
Proprietary knowledge is easier to appropriate when intellectual property rights such as patents and
trademarks are weak. Even with strong protections firms protect their knowledge through secrecy.
Instead of licensing their knowledge to independent local producers, firms exploit it themselves in their
own production facilities. In effect, they internalize the market in knowledge within the firm. The theory
claims the internalization leads to larger, more multinational enterprises, because knowledge is a public
good. Development of a new technology is concentrated within the firm and the knowledge then
transferred to other facilities.

As the world becomes more of a global village, internationalisation has gained much discussion in recent
years. What is internationalisation, exactly? How can an international firm enter new markets? What are
the advantages and disadvantages of expanding internationally? In today's explanation, we will find out.

What is internationalisation?

Internationalisation is the process of a company branching out to foreign markets to capture a greater
market share. The trend towards internationalisation contributes to globalisation - the state where
economies worldwide become integrated due to cross-border trade
and investments. Internationalisation may require companies to adapt their product features and
branding to match the cultural and technological needs of the local market.

How to operate in international markets?

Let's take a look at how businesses can operate in international markets.

Drivers for internationalisation

Four main reasons for a business to expand its operations abroad are:

Achieve growth: the local market may have a limited customer base or become saturated over time,
expanding overseas is the only for businesses to increase their market share and continue growing.

Improve profitability: international businesses can take advantage of marketing and technological
advantages in the host country or introduce higher prices to new customers to achieve higher profits.

Spread the risk: by going international, the business can lessen its redundancy on one market or
customer base. In case of a market failure or a shift in customer behaviour, it can still rely on other
operations elsewhere for survival.

Increase competitiveness: companies operating overseas have greater economies of scale to lower
the cost of their business and be more competitive. The presence on a global scale also boosts the
company’s reputation and allows it to attract more customers compared to local businesses.

Factors determining the attractiveness of international markets

In most cases, the attractiveness of a foreign market is assessed based on six factors:

 The size and expected growth of the market

 The accessibility of the market (geographical, political, legal, technological, social barriers)
 The compatibility of different markets in the company’s portfolio
 Resource availability and the distance to the target market
 Competitive environment
 External influences (PESTLE)

Reasons for producing products abroad

Offshoring is the process of moving a company’s production abroad.

The strategy is often adopted by international firms to achieve a cost advantage through a cheaper
labour force and lower taxes. The company may also consider offshoring to reduce the pressure on the
local resources.

That said, offshoring can reduce product quality or brand image.

Some global companies suffer from a reduced reputation due to underpaying local workers in developing
countries. There are communication, cultural, logistical issues or low-skilled workers that reduce the
business efficiency and product standards.

When the company realises the real cost of offshoring outweighing the advantages, it will consider
‘reshoring’ - the return to producing the products locally.

How does an international company enter new markets?

Typically, there are five ways a business can enter a market:

 Export: The business produces the products locally and sells them abroad. This is the most popular
and least risky method of becoming an international business.
 Direct investment: The company setups manufacturing overseas or takes over or merges with a
foreign business. Although direct investment allows the business to cut down on tax and
transportation costs, it’s also the highest risk and most expensive option out of four market entry
modes.
 Licensing: The original business licenses other firms to manufacture and sell its products. The
licensee pays a fee to reserve a trademark of the licensor’s products.
 Franchising: Franchising is the same as licensing, only that the original business still has some
control over the manufacturing and marketing processes of the licensees. This approach is much
more economical than setting up a foreign facility or taking over the local business.
 Joint ventures: The company partners with an overseas business to take advantage of its know-how
 upon entering a new market.

What are internationalisation models?

When carrying out internationalisation processes, these four models help managers to make better
decisions:

1. Uppsala internationalisation model

Uppsala model is the internationalisation model of successive market entry where firms use past
learning and experience in established markets to intensify their commitment to the new market.
According to the Uppsala theory, firms should enter new markets with successively greater psychic
distance.

Psychic distance refers to cultural, language, and political differences between countries.
The idea is that approaching regions with a closer psychic distance first will equip the firm with
knowledge and resources to conquer more complex markets.

Figure 1 shows the four successive stages of the internationalization process:

Figure 1. Steps of Internationalisation

2. Transaction cost approach

The transaction cost approach states that firms should internationalize in a way that incurs the least
foreign trade costs. If the cost of setting up a joint venture is lower than the traditional selling/buying
between countries, the company should initiate internationalisation processes. Otherwise, it’s better to
stay domestic.
The transaction cost approach is carried out based on two assumptions: bounded rationality (act with
incomplete information) and opportunistic behaviour (act for one's interest).

The choice of market entry mode, in this case, depends on the nature of the market. In the perfect
market conditions, companies can choose a low-control entry mode such as exporting or licensing as
partners are replaceable. In imperfect markets, other higher-level entry models such as joint ventures
should be adopted to prevent opportunistic behaviours.

2. Dunning eclectic approach

Dunning electric approach is an approach for entry mode selection that takes into account the
ownership advantage, location advantage and internationalisation advantage.

Companies should internationalize only when all three of the following conditions are met:
 Ownership advantage: the company has more advantages thanks to its owning facilities abroad.
The advantages could be tangible (lower production costs) or intangible (know-how).
 Location advantage: the location comes with many favourable factors such as labour, energy,
transportation, material source, etc. compared to the traditional model of selling abroad such as
exports.
 Internationalisation advantage: it's more profitable for the firm to explore advantages in new
markets rather than selling to a foreign company.

4. The network approach

The network theory is drawn on the fact an international company should not act separately but must
form a network of connections with other firms in the industry. This way, it can gain valuable insights and
resources to advance its move to foreign markets.

Figure 2 shoes three ways a firm can integrate itself into an international environment:

A domestic enterprise establishes a foreign business network.

A domestic enterprise builds a foreign business network outside of the target market.
A group of domestic enterprises works together to enter a new market.

Figure 2. International network approach

How does internationalisation impact different functions of business?

Internationalisation can affect various business functions, including human resources, finance,
marketing, operations, and management.

Here's a more detailed breakdown with examples:

Human resources
Internationalisation processes can lead to changes in the Human and Resources department of the
company.

 Managers may need to go under training or get advice from advisors to hire an international
workforce.
 Multinational companies may also face cultural and legal problems when hiring and motivating
foreign workers.
 Offshoring may trigger resentment among underpaid workers in developing countries.
 Licensing and franchising may require the company to develop thorough training programs to
maintain the quality and culture of the original business.

Finance

The expansion to other territories requires a substantial investment which incurs many risks for the
international business.

 Setting up a manufacturing facility broad or acquiring a foreign business can take up a lot of financial
resources. However, there’s no guarantee this will generate a positive return.
 Offshoring can reduce costs of production but there might be hidden costs when the company
switched back to producing locally.
 Franchising, licensing, and exporting are much less risky ways in terms of finance for a global
business.

Marketing

A lot of marketing decisions are associated with the internationalisation process.

 Extensive market research has to be carried out to ensure the product is needed abroad Some
customers may prefer a product made in a certain country than the other, e.g. Made in the UK.
 Introducing new products to a foreign market also uses up a considerable amount of market. There
are also marketing costs to competing with businesses in the host country.

Operations

The method of becoming an international business can have an effect on operations management.

 When offshoring is adopted, the product manager must ensure the product quality is as good or
better than when produced locally.
 A multinational business may need to carry out more collaborative work to ensure cohesion in the
processes and culture of all markets around the world.
 Management

One major challenge of an international business is to manage change in an effective and coherent
manner.

Examples of internationalisation

Let's take a look at the international strategies of some famous corporations worldwide:

McDonald's

Started as a humble brand selling hamburgers, McDonald’s had grown into a successful multinational
company with 39,000 locations in over 100 countries. The company’s internationalisation strategy is
based on franchising, the practice of granting a business operation (franchisee) to market the company’s
products. Around 93% of restaurants are operated by independent local business owners.3

Nike

Nike’s first move to internationalisation began in 1975 when it opened its first office in Taiwan. It now
has branches all over the world. Like other multinational companies, Nike shoes, apparel, and other
accessories are not made in the US but outsourced to lower labour cost countries in Asia and Latin
America. As of today, the company has over 700 plants in 42 countries.4

Starbucks

Starbucks is a multinational chain of coffeehouses headquartered in Washington. For 50 years, the

company has successfully branded itself in 83 countries with 32,938 stores opened. Part of Starbucks’
success lies in its ability to adapt to the culture and infrastructure of the foreign markets. For example, in
Japan, Starbucks’ coffeehouse resembles the traditional tea house of the Japanese. They also include
matcha, the religious drink in Japan, to appeal to the local customers.


3. Give an example of eclectic paradigm theory.

Eclectic Paradigm
An eclectic paradigm, also known as the ownership, location, internationalization (OLI) model or OLI
framework, is a three-tiered evaluation framework that companies can follow when attempting to
determine if it is beneficial to pursue foreign direct investment (FDI). This paradigm assumes that
institutions will avoid transactions in the open market if the cost of completing the same actions
internally, or in-house, carries a lower price. It is based on internalization theory and was first
expounded upon in 1979 by the scholar John H. Dunning.

Example:-
Case study of Shanghai Vision Technology Co. Ltd.
According to Research Methodology, independent research and analysis firm Shanghai Vision
Technology Company utilized this paradigm while deciding to export its 3D printers and other
unique technologies. While they carefully considered the disadvantages of higher tariffs and
transportation expenses, their internationalization approach ultimately enabled them to thrive in
new markets.
4. Explain the Ad valorem Duty with an example.

Ad Valorem Duty:

These duties are imposed “according to value.” When a fixed percent of value of a commodity is
added as a tariff it is known as ad valorem duty. It ignores the consideration of weight, size or
volume of commodity.
The imposition of ad valorem duty is more justified in case of those goods whose values cannot be
determined on the basis of their physical and chemical characteristics, such as costly works of art,
rare manuscripts, etc. In practice, this type of duty is mostly levied on majority of items.

Examples of Ad Valorem Tax

Ad valorem taxes often form the main sources of revenues for state and municipal governments.
The government unit may require any business or individual owning an asset or doing business
within its jurisdiction to pay ad valorem tax. The most common ad valorem taxes are:

Property tax
Property tax is an ad valorem tax that the owner of real estate or other commercial and residential
properties pays on the value of their property. The term “property” refers to land, personal
property (such as a car or aircraft), and improvements to land (immovable man-made
improvements). Tax authorities may hire evaluators to determine the value of the property on a
regular basis before arriving at the final tax assessment value. The items taxed under property taxes
vary by jurisdiction, and most government units exempt household goods, inventories, and
intangible properties such as bonds.

How property tax is determined

In many states, there exists a central appraisal authority that values all properties and shares the
data with the local government units or tax authorities. The authorities then use the valuations to
set a tax rate and impose an ad valorem tax on the property owners. This tax is computed by
multiplying the assessed value of the property by the millage rate applicable to each property. The
millage rate is expressed as a multiple of 1/1000 of a dollar.

Sales tax
Sales tax is a tax charged at the point of purchase of certain goods and services. The tax may be
included in the price of the product or added at the point of sale. Sales tax is charged as a
percentage by tax authorities. The seller of the product is authorized to collect the tax at the point
of purchase from the final consumer and forward the levies to the relevant tax authority. Goods
sold to businesses for resale are excluded from sales tax, as long as the purchaser produces a resale
certificate and a statement that the goods are for resale. Different types of sales tax include seller
taxes, consumer excise taxes, and retail transaction taxes.

Sales tax rates around the world

Sales tax is charged at the national, state, and municipal levels and the rate varies by country.
Countries in Western Europe such as Norway, Sweden, and Denmark charge higher sales tax, as
much as 25% – more than most countries around the world. In most states in the US, sales tax
comprises the tax for the national, state, county, and city tax. For example, Chicago charges a sales
tax of 10.25%, which includes 6.25% state tax, 1.25% city tax, 1.75% county tax, and 1% for the
regional transportation authority. Los Angeles charges a 9.5% sales tax, which comprises 7.25%
state tax, 2% county tax, and 0.25% city tax.

Value Added Tax (VAT)

VAT tax is sometimes referred to as a goods and services tax (GST) in some countries. It is charged
on the value added by a business on the goods and services it purchases from the market. VAT
differs from sales tax because the latter is charged on the total value of the goods or services. It is
an indirect tax that is collected from a different party than the one who bears the cost of the tax.
For example, when a consumer purchases a cup of coffee, they are essentially paying VAT for the
entire production process from the cultivation, purchase of coffee beans, processing, and the final
product, since coffee becomes valuable at each stage.

Summary
An ad valorem tax is a tax that is based on the assessed value of a property, product, or service. The
most common ad valorem tax examples include property taxes on real estate, sales tax on
consumer goods, and VAT on the value added to a final product or service. Ad valorem taxes
comprise one of the primary sources of revenue for state, county, and municipal governments.
4. Discuss the different types of Quota System?
Quota System:
Under this system, a country may fix in advance, the limit of import quantity of a
commodity that would be permitted for import from various countries during a given
period. The quota system can be divided into the following categories:
(a) Tariff/Customs Quota
(b) (b) Unilateral Quota
(c) (c) Bilateral Quota
(d) (d) Multilateral Quota

Tariff/Customs Quota: Certain specified quantity of imports is allowed at duty free or at

a reduced rate of import duty. Additional imports beyond the specified quantity are
permitted only at increased rate of duty. A tariff quota, therefore, combines the features
of a tariff and an import quota.

Unilateral Quota: The total import quantity is fixed without prior consultations with the
exporting countries.

Bilateral Quota: In this case, quotas are fixed after negotiations between the quota fixing
importing country and the exporting country.

Multilateral Quota: A group of countries can come together and fix quotas for exports as
well as imports for each country.
 5. Difference between absolute cost theory and comparative cost theory.

What is the Difference Between Absolute Cost Advantage and Comparative Cost Advantage?

The key difference between absolute cost advantage and comparative cost advantage is that absolute cost
advantage focuses on manufacturing a product at the lowest cost to gain competitive advantage whereas
comparative cost advantage focuses on manufacturing a particular product at a lower opportunity cost to ensure
relative productivity than other businesses.

Absolute cost advantage provides the ability to produce more goods for a cheaper cost with the same amount of
resources in comparison to other businesses while comparative cost advantage provides better products than
other businesses. In absolute cost advantage, trade is not mutually beneficial; it only benefits the business with
absolute advantage; however, in comparative cost advantage, trade is mutually beneficial. So, this is
another difference between absolute cost advantage and comparative cost advantage.

Summary – Absolute Cost Advantage vs Comparative Cost Advantage

The key difference between absolute cost advantage and comparative cost advantage is that absolute cost
advantage is the ability of a business to manufacture more products with the same amount of resources than
another business whereas comparative cost advantage is the ability of a business to manufacture products
better than another business with the same amount of resources. These concepts mostly influence how and why
countries and businesses offer resources to the manufacture of particular commodities.