Internationalization or internationalisation is the process of increasing involvement of enterprises in international markets, although there is no agreed definition of internationalization. Internationalization is a crucial strategy not only for companies that seek horizontal integration globally but also for countries that addresses the sustainability of its development in different manufacturing as well as service sectors especially in higher education which is a very important context that needs internationalization to bridge the gap between different cultures and countries. There are several internationalization theories which try to explain why there are international activities.
Entrepreneurs and enterprises Those entrepreneurs who are interested in the field of internationalization of business need to possess the ability to think globally and have an understanding of international cultures. By appreciating and understanding different beliefs, values, behaviors and business strategies of a variety of companies within other countries, entrepreneurs will be able to internationalize successfully. Entrepreneurs must also have an ongoing concern for innovation, maintaining a high level of quality, be committed to corporate social responsibility, and continue to strive to provide the best business strategies and either goods or services possible while adapting to different countries and cultures.
Trade theories
Absolute cost advantage (Adam Smith, 1776)
Adam Smith claimed that a country should specialise in, and export, commodities in which it had an absolute advantage. An absolute advantage existed when the country could produce a commodity with less costs per unit produced than could its trading partner. By the same reasoning, it should import commodities in which it had an absolute disadvantage.
While there are possible gains from trade with absolute advantage, comparative advantage extends the range of possible mutually beneficial exchanges. In other words, it is not necessary to have an absolute advantage to gain from trade, only a comparative advantage.
Comparative cost advantage (David Ricardo, 1817)
David Ricardo argued that a country does not need to have an absolute advantage in the production of any commodity for international trade between it and another country to be mutually beneficial. Absolute advantage meant greater efficiency in production, or the use of less labor factor in production. Two countries could both benefit from trade if each had a relative advantage in production. Relative advantage simply meant that the ratio of the labor embodied in the two commodities differed between two countries, such that each country would have at least one commodity where the relative amount of labor embodied would be less than that of the other country.
Gravity model of trade (Walter Isard, 1954)
The gravity model of trade in international economics, similar to other gravity models in social science, predicts bilateral trade flows based on the economic sizes of (often using GDP measurements) and distance between two units. The basic theoretical model for trade between two countries takes the form of:
with:
: Trade flow
: Country i and j
: Economic mass, for example GDP
: Distance
: Constant
The model has also been used in international relations to evaluate the impact of treaties and alliances on trade, and it has been used to test the effectiveness of trade agreements and organizations such as the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO).
Heckscher–Ohlin model (Eli Heckscher, 1966 & Bertil Ohlin, 1952)
The Heckscher–Ohlin model (H–O model), also known as the factors proportions development, is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries will export products that utilize their abundant and cheap of production and import products that utilize the countries' scarce .
The results of this work have been the formulation of certain named conclusions arising from the assumptions inherent in the model. These are known as:
Heckscher–Ohlin theorem Rybczynski theorem Stolper–Samuelson theorem Factor-Price Equalization theorem
Leontief paradox (Wassily Leontief, 1954)
Wassily Leontief's paradox in economics is that the country with the world's highest capital-per worker has a lower capital:labour ratio in exports than in imports.
This econometric find was the result of Professor Wassily W. Leontief's attempt to test the Heckscher-Ohlin theory empirically. In 1954, Leontief found that the U.S. (the most capital-abundant country in the world by any criteria) exported labor-intensive commodities and imported capital-intensive commodities, in contradiction with Heckscher-Ohlin theory.
Linder hypothesis (Staffan Burenstam Linder, 1961)
The Linder hypothesis (demand-structure hypothesis) is a conjecture in economics about international trade patterns. The hypothesis is that the more similar are the demand structures of countries the more they will trade with one another. Further, international trade will still occur between two countries having identical preferences and factor endowments (relying on specialization to create a comparative advantage in the production of differentiated goods between the two nations).
Location theory
Location theory is concerned with the geographic location of economic activity; it has become an integral part of economic geography, regional science, and spatial economics. Location theory addresses the questions of what economic activities are located where and why. Location theory rests—like microeconomic theory generally—on the assumption that agents act in their own self-interest. Thus firms choose locations that maximize their profits and individuals choose locations, that maximize their utility.
Market imperfection theory (Stephen Hymer, 1976 & Charles P. Kindleberger, 1969 & Richard E. Caves, 1971)
In economics, a market failure is a situation wherein the allocation of production or use of goods and services by the free market is not efficient. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that can be improved upon from the societal point of view.Krugman, Paul, Wells, Robin, Economics, Worth Publishers, New York, (2006). The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick.
Market imperfection can be defined as anything that interferes with trade. This includes two dimensions of imperfections. First, imperfections cause a rational market participant to deviate from holding the market portfolio. Second, imperfections cause a rational market participant to deviate from his preferred risk level. Market imperfections generate costs which interfere with trades that rational individuals make (or would make in the absence of the imperfection).
The idea that multinational corporations (MNEs) owe their existence to market imperfections was first put forward by Stephen Hymer, Charles P. Kindleberger and Caves. The market imperfections they had in mind were, however, structural imperfections in markets for final products.
According to Hymer, market imperfections are structural, arising from structural deviations from perfect competition in the final product market due to exclusive and permanent control of proprietary technology, privileged access to inputs, scale economies, control of distribution systems, and product differentiation, but in their absence markets are perfectly efficient.
By contrast, the insight of transaction costs theories of the MNEs, simultaneously and independently developed in the 1970s by McManus (1972), Buckley and Casson (1976), Brown (1976) and Hennart (1977, 1982), is that market imperfections are inherent attributes of markets, and MNEs are institutions to bypass these imperfections. Markets experience natural imperfections, i.e. imperfections that are because the implicit neoclassical assumptions of perfect knowledge and perfect enforcement are not realized.
New Trade Theory
New Trade Theory (NTT) is the economic critique of international free trade from the perspective of increasing returns to scale and the network effect. Some economists have asked whether it might be effective for a nation to shelter infant industries until they had grown to a sufficient size large enough to compete internationally.
New Trade theorists challenge the assumption of diminishing returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market (via a network effect).
Specific factors model
In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. Thus, this model can be interpreted as a 'short run' version of the Heckscher-Ohlin model.
Traditional approaches
Diamond model (Michael Porter)
The diamond model is an economical model developed by Michael Porter in his book The Competitive Advantage of Nations, where he published his theory of why particular industries become competitive in particular locations.
The diamond model consists of six factors:
Factor conditions Demand conditions Related and supporting industries Firm strategy, structure and rivalry Government Chance
The Porter thesis is that these factors interact with each other to create conditions where innovation and improved competitiveness occurs.
Diffusion of innovations (Rogers, 1962)
Diffusion of innovation is a theory of how, why, and at what rate new ideas and technology spread through cultures. Everett Rogers introduced it in his 1962 book, Diffusion of Innovations, writing that "Diffusion is the process by which an innovation is communicated through certain channels over time among the members of a social system."Rogers, Everett M. (2003). Diffusion of Innovations, 5th ed. New York, NY: Free Press.
Eclectic paradigm (John H. Dunning)
The eclectic paradigm is a theory in economics and is also known as the OLI-Model. It is a further development of the theory of internalization and published by John H. Dunning in 1993. The theory of internalization itself is based on the transaction cost theory. This theory says that transactions are made within an institution if the transaction costs on the free market are higher than the internal costs. This process is called internalization.
For Dunning, not only the structure of organization is important. He added three additional factors to the theory:
Ownership advantages (trademark, production technique, entrepreneurial skills, returns to scale) Locational advantages (existence of raw materials, low wages, special taxes or tariffs) Internalisation advantages (advantages by producing through a partnership arrangement such as licensing or a joint venture)
Foreign direct investment theory