Within a global business environment where boundaries are non-existent, several organisations have begun to expand their operations and to exploit different markets. International business expansion is the direction that companies seeks to pursue toward the achievement of their business goals. Today, the companies are more concern with acquiring competitive and comparative advantages and leveraging economies of scope and scale. Luo (1999) defines international expansion as “the process by which a multinational enterprise (MNE) enters and invests in a target foreign country in pursuit of the strategic objectives” (pp. 3-4).
Nonetheless, all firms which have substantial direct investment in foreign countries regardless of the size could be considered under international expansion. As such, international expansion concerns the precursor investment decisions of how, what, where and when the business should expand during internationalisation process (Ibid). Internationalisation is processual and a concept that explains the slow and incremental nature of cross-border transactions as well as the predictable pattern of such process. Several theories elucidate the dynamics of international expansion.
These theories are divided into classical (or early trade) and modern trade theories. Factor proportions theory and product cycle theory are examples of classical theories while monopolistic advantage theory, Porter’s diamond of national competitive advantage and Dunning’s eclectic paradigm falls under the second category. The classical theories are taken from a domestic perspective as they focus on the rationale behind counties should trade as well as what the factors affecting trade patterns are. On the other hand, the new trade theories contend that economies of scale are an important factor for superior international performance.
Factor Proportions Theory (or Heckscher-Ohlin Theory)
Developed by Eli Heckscher in 1999 and retaliated by Bertil Ohlin in 1933, factor proportions theory claims that the differences in a country’s relative endowments such as land, labor and capital explain differences in the cost of production factors. The strong points of the theory asserts that a country tends to export products that utilise abundant production factors since they are relatively cheaper and that each country should produce and export products that of production factors and import goods which use scarce factors of production. However, this theory only concerns the methods of production and patterns of consumption and that the elements that are integrated prior to production and what constitute and influence such consumption trend. The theory assumes that production function of particular good and the consumer preferences will be identical between countries (John, Ietto-Gillies and Grimwade, 1996, p. 155).
Product Cycle Theory
This theory was developed by Raymond Vernon in 1966 to respond to the failure of the Heckscher-Ohlin model to explain the explicit pattern of international trade. Product cycle theorises that the optimal location for the production of specific types of goods and services shift over time as they pass through the stages of: introduction, growth, maturity and decline. The supposition that early in the product’s life all the parts and labor associated with that product come from the area where it was invented and that as the product was adopted and utilised in the global markets, it moves away from the point of origin is the strong suit of the theory. Product innovators will eventually become the net importer of the product when the product reaches maturity. Compared to the first theory, Vernon recognises the role and influence of technology and expertise (Hill, 2005). One of the flaws of Vernon’s theory is the inherent exclusion to typical pattern of the PLC such as products that have very short life cycles, luxury goods and services, products that require specialised labor, products that are differentiated from competitive offerings and products with high transportation costs.
Monopolistic Advantage Theory
Advanced by the theorists from the developed countries with the seminal contribution of Stephen Hymer, the monopolistic advantage theory argues that the existence of imperfections in the markets for production factors are driven by key sources of monopolistic advantages. These include propriety knowledge, patents, unique know-how and skills and sole ownership of the assets. Barclay (2000, p. 279) maintains that foreign direct investment (FDI) is at the heart of this theory, suggesting that MNE’s preference for direct investments will provide them the control over resources and capabilities in the foreign market as well as a degree of monopoly power in relation to competitors. The benefit of the theory is its main strength which is the capability to operate foreign subsidiaries more profitably than the local than the local firms that compete in their own markets. This is especially true in the case of a European pharmaceutical company Novartis. Novartis earns substantial profits through marketing various patent medications via its subsidiaries worldwide. The drawback is on the fast-paced changes and eventual obsolesce due to the further development in intellectual intangibilities. In the case of the Novartis, the downside is on the relatively faster rate of medical developments in various part of the world, making the business vulnerable to competitive pressures.
Porter’s Diamond of National Competitive Advantage
For the last 25 years, Michael Porter has been the most influential management guru because of his theories of competitive advantage. The Porter diamond model theorises that domestic competitive advantage is embedded in four determinants: factor endowments, demand conditions, related and supporting industries and firm strategy, structure and rivalry (Porter, 1998). The four elements which lead to the national competitive advantage are availability of resources, informations that firms use to decide which opportunities to pursue, goals of individuals in companies and pressure to innovate and invest; which in itself is a strong point. Other strengths are the perception of the diamond as a system and the role played by the government. The critique of the model points out that Porter theorise about the competitive advantage of the firms and industries with emphasis on physical proximity and the nations themselves, and that the theory does not adequately deal with dynamics and misdescribe important types of firms such as non-trade sectors and resources (Yetton, Craig, Davies and Hilmer, 1992).
Dunning’s Eclectic Paradigm
John Dunning based his explanations on FDI, arguing that there are three conditions whether or not a company will internalise through FDI. These are ownership-specific advantages – the knowledge, skills, capabilities, relationships or physical assets that form as the basis of the competitive advantage; location-specific advantages – advantages associated with the country the business invests including factor endowments, skilled/low cost labor and inexpensive capital; internationalisation advantages – control derived from internationalising value chain activities such as manufacturing and distribution. A company example is the Siemens, a German MNE, specialising in electrical engineering and electronics. Siemens owns geographically-dispersed factories which provide optimal access to natural resources and the skilled and low-cost human capital. In 190 countries, the company also leverages the knowledge-based of its employee base and invests in diversified services that include lighting, medical equipment and transportation machinery. Based on the case of Siemens, the main strength of the theory is the explicit justification on why FDI which could further lead to multipoint competition through externalities (Hill, 2008). The full integration of this theory, which is also known as the OLI model, however, lies in the specialistic nature of the application. For instance, the conditions of the domestic market must be considered such as saturated market, too competitive market and limited market share (Hansson and Hedin, 2007). Realising this, it would be problematic for Siemens to penetrate domestic markets which have relatively advanced technological capabilities like Japan.
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