Introduction
Internalization is the process, as it relates to international strategic management, which requires transaction to occur within the confines of the corporate assets, rather than externalizing and interacting more heavily with the open market. This form of business interaction has certain advantages, abut can also pose serious disadvantages as the business works to move into new global markets.
The following paper will work to determine to what extent internalization creates an atmosphere of global risks for companies in the middle of globalization. Currently, there is a shortage of research as it relates to the impact of internalization on business growth, risk, and success as it enters the international market.
The existing literature in the topic indicates that there is increased growth in the international market and so a high need for an understanding of how internalization, when compared to externalization provides avenues for meaningful growth. First, it is important to understand what globalization, and international expansion are, and how they are related to a business’s long term success. These definitions will be pursued, within the existing literature.
Further the literature shows that that internalization gives the company a different kind of opportunity for growth, within the market (Onetti et al., 2012). As such, it will be demonstrated how internalization is directly related to international opportunity. Specifically, as it demonstrates operational efficiency and focused development (Chandra et al., 2012). Conversely, however, it also demonstrates that there are increased risks that occur when there is an increased assumption of risk that occurs when businesses opt not to externalize. This includes the liability of foreignness (Chen, Hu, & Zhang, 2010) and the liability of outsidership (Johanson & Vahlne, 2009). However the literature fails to quantify the way that internalization creates increased risk, as it relates to investment, when compared to externalized companies similarly investing and expanding. This is significant for both business managers, or decision makers, and investors, when determining the best course of action as it relates to globalization. As such, the purpose of this study is to demonstrate the impact of industrialization on corporate risk.
Literature Review
The following literature review will work to examine the existing evidence as it relates to the internalization theory, and its impact on commercial risk. More specifically, it will begin by creating a definition for the internalization theory, followed by developing a complete understanding of commercial risk as it relates to globalization, and finishing by relating the internalization theory to those commercial risks, in an effort to define the impact of internalization on commercial risk
Defining Internalization Theory
Internalization theory is an economic premise, which is the foundation for a unique branch of economics that are specifically related to international business activities (Rugman, A.M. & Collinson, S., 2012). A company that internalizes tries to keep effort, resources, and movement completely internal. This allows them to keep a closer control of resources, and to conceal movement from competitors, offering an advantage. This occurs on two primary levels: first, it occurs in a company’ knowledge base, and secondarily in their production (Markusun, 1995). Knowledge flow includes proprietary information and intellectual property, like prototypes, patents, and management systems. This information internally strengthens the brand and determines its overall trajectory. In contrast, the production flow includes suppliers, production processes, facilities and more. These control a company’s speed, quality and price and are an important for the overall success of a company, and are extremely important to the global expansion. Theoretically, internalization can result in larger multinational enterprises, because they allow the brand to focus on internal growth, and thus the production process is more refined, and corporately specific (Buckley, 2009). As such, internalization is directly related to a company’s ability to globalize.
Understanding Commercial Risk as it Relates to Globalization
Commercialization is the process of bringing a new product to market. As such commercial risk, within the confines of this paper, will be defined as the risks related to brining a new product to market (Jolly, 2009). As such, when a business moves to internationally expand, by producing and releasing an existing product within a new market, they face a certain level of commercial risk. Risks are related to when to launch, where to launch, and how to select and reach an ideal target market. (Dibbs et al., 2001). These risks must be weighed in the decision to internalize, each time that a brand expands internationally. As such, it is critical to further determine the ways in which internalization directly impacts a business’s commercial risk, as it relates to their outcome.
Increased growth in international trade, foreign direct investment and increase in cross-border technology flow has remained instrumental in influencing the level of internalization experienced among companies (Onetti et al., 2012). Internalization provides companies with the opportunity for geographic growth, which remains instrumental for additional business growth as it provides potential opportunities relating to the growth of a larger market, increase spread of risk, production efficiencies and exposure to new production methods, which remain vital in influencing overall business growth and development (Chandra et al., 2012). Increased growth of emerging markets provides a viable opportunity for business to engage in internalization.
Increasing research has been adopted that seeks to identify the impact of internalization of firm performance through increased operational efficiencies attributed to reduced labor and resource costs that influence the revenue generation and consequent profits derived from the process (Dimitratos et al., 2011). Studies about internalization maintain that increased global expansion provides the business with potential challenges attributed to expansion such as increased complexity and uncertainty (Landau et al., 2016). Competitive advantage is crucial in the internalization process for any organization that is developing new global locations (Ladau et al., 2016). When implemented, internalization is associated critically with institutional structure and business growth within an organization, even within an organization expanding internationally (Ladau et al., 2016). However, internalization influences the development of a blend between diverse cultures, customers, competitors and regulation, which may remain instrumental in influencing the level of business growth (Zheng et al., 2010).
As such, it also increases certain liabilities related to the company culture, and entering a foreign market. According to Chen, Hu, & Zhang (2010), the liability of foreignness effects multinational companies when they enter a new company, and try to internalize rather than joining with foreign allies, and so lack a formal understanding of the laws, social rules, and cultural customs that impact business within the new nation. Similarly, the liability of outsidership states that they struggle to become actively engaged in the network, and to find investors within the country (Johanson & Vahlne, 2009). As such, there is a gap in measuring the impact of these mediating factors, or the two types of liability, on commercial risk, as it relates to performance outcomes within a business strategic approach (Johanson & Vahlne, 2009).
Research Questions
The key research questions that seek to guide the study include:
What is the impact of internalization on commercial risk when globalizing, if commercial risk is defined as the risk of an inability to grow, profit, and secure international investment in a given market (Johanson & Vahlne, 2009)?
What is the financial impact of specific liability features, like liability of foreignness and liability of outsidership act as mediators to commercial risk?
What is the impact of commercial risk on the international growth model for a company?
Independent Variables: Internalization,
Dependent variables: commercial risk
Mediators, liability of foreignness (Chen, Hu, & Zhang, 2010), and liability of outsidership (Johanson & Vahlne, 2009).
Null Hypothesis: There is no impact of internalization on commercial risk when globalizing, if commercial risk is defined as the risk of an inability to grow, profit, and secure international investment in a given market.
Alternative Hypothesis: There is an active impact of internalization on commercial risk when globalizing.
These questions are important to the literature, because they begin to establish a quantitative measure to the relationships which have been established only qualitatively to current. There is a strong body of evidence to suggest that there is a relationship between internalization and risk, however, as we begin to establish what that relationship is, it can be more effectively managed in future projects.
Methodology
The study, which is quantitatively concerned with internalization and outcomes for a brand when expanding internationally. This will be accomplished through data collected via a quasi-experiment based on data from secondary sources, and according to experiment and control groups established through natural behavior.
A total of 500 businesses will be included in the sample, as collected via contact with the businesses media department, or other similar business information providers, and via publically released information available from company disclosures. According to Fowler’s (2009) table, the study will use a 95% confidence error with a 4 percent margin of error, and then split into control and experimental groups.
First sample companies will be sorted according to whether or not they internalize. In other words, the control group will be made up of businesses that partner with local entities to avoid foreignness and outsidership, and the experiment group will be those that elect to remain internalized during the process of international expansion.
As previously identified, commercial risk will be defined as “inability to grow, profit, and secure international investment in a given market,” as such, data will be collected via Bloomberg regarding each company selected as part of the sample’s, profitability, year over year revenue growth, and total international investment funds. Outcomes will then be compared, via comparative statistics, to determine the measurable impact that the impact of foreignness and outsidership have on the primary factors of commercial risk.
Data will be analyzed quantitatively, in order to determine the difference between internalization and externalization as it relates to commercial risk, and corporate outcomes, as mediated by the impact of foriegnness and the liability of outsidership. This will be accomplished through descriptive statistics, completed through SPSS, after the data is collected and transcribed into the program. These statistics can then be used comparatively, to discover the difference in outcomes between the control and experiment groups.
Anticipated ethical issues with the study include the risk of harm, and need for anonymity. For many businesses, the information that is requested can be considered sensitive, especially for companies that internalize, and so consider their proprietary information extremely confidential. In order to protect the businesses which are included in the study, it is important for them to be identified by number, rather than name within the study. This will minimize the risk of self-harm.
Significance
The purpose of this experimental study is to test the theory of internalization as it describes a business’s mode of interacting with the business environment, and as that performance compares to businesses, which use an externalized approach. The independent variable, internalization, will be related to commercial risk, controlling for the liability of foreignness and outsidership. The independent variable, internalization, will be defined as a business that uses internal assets, rather than seeking outside support. The dependent variable, commercial risk, will be defined as the risk a company takes, specifically the financial risks assumed, when entering a new market, and the moderating variables, foreignness and outsidership will relate to the brands disconnect, or distance, between existing businesses and the needful cultures of the new venture, in a new cultural environment.
Theoretical Perspective
The theory that I will use is the internalization theory. It was developed by and was used to study the activity of businesses that enter the international market. It was developed to study economic outcomes in globalization from a corporate perspective. This activity can be broken into two categories, knowledge flows, as it relates to research and development, intellectual property, and patenting, and production flows, as it relates to the physical development of the product. This theory indicates that internalization has a direct impact on commercial risk and business success. As applied to this study, the internalization theory holds that I would expect my independent variable, internalization, to influence or explain the level of commercial risk, as the dependent variable, because risks are developed during interaction with the market and determining the way a business creates a product delivery system within the market.
References:
Buckley, Peter J (2009). "The internalisation theory of the multinational enterprise: A review of the progress of a research agenda after 30 years". Journal of International Business Studies. 40 (9): 1563–1580. doi:10.1057/jibs.2009.49.
Dibb, S. et al. (2001): Marketing – Concepts and Strategies; Fourth European Edition .Houghton Mifflin; Boston.
Chandra, Y., Styles, C., & Wilkinson, I. F. (2012). An opportunity-based view of rapid
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Dimitratos, P., Petrou, A., Plakoyiannaki, E., & Johnson, J. E. (2011). Strategic decision-making
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Jolly, V. K. (2009). Commercializing New Technologies: Getting from Mind to Market; Harvard Business School Press.
Landau, C., Karna, A., Richter, A., & Uhlenbruck, K. (2016). Institutional leverage capability:
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Markusen, J. R. (1995). "The Boundaries of Multinational Enterprises and the Theory of International Trade". Journal of Economic Perspectives. 9(2): 169. doi:10.1257/jep.9.2.169.
Onetti, A., Zucchella, A., Jones, M. V., & McDougall-Covin, P. P. (2012). Internationalization,
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Rugman, Alan M.; Collinson, Simon (2012). International Business. New York: Pearson. ISBN 978-0-273-76097-9.
Zheng, W., Yang, B., & McLean, G. N. (2010). Linking organizational culture, structure,
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ACLARACIONES
Yes, in this case you will treat is a dicotomic. Internalization is a transaction conducted within the confines of a corporation rather than in the open market. Internalization can apply to a multinational corporation shifting assets between subsidiaries cross border. In investing, internalization refers to the decision by a brokerage firm to fill a buy order for shares of security from its own inventory of shares rather than seeking to execute the trade using outside inventory
As measured by strategic alliances and joint ventures - fully internalized will have zero strategic alliances and joint ventures
Instrumental is just a work like "key" or "significant". ..same meaning
