Internationalization of service firms | Management Optional Notes for UPSC PDF Download

Internationalization

In current economic situation, services are more significantbecause companies are operating at global level. Services are the fastest growing part of international tradeinternationalisation.It is generallyobserved as a process through which companyprogresses from its home market to global markets (O'Farrell et al., 1998). Hence, internationalisation of services is attracting to management scholars for research. The fact that services are a motivating force and the fastest increasing sector in worldwide trade attracts academicians to follow the alterations occurred in the service business.Currently, technology advancement in marketplace and varying economic markets have brought new insights which have great impact on the internationalisation processes of the any organization. It is obvious that internationalisation not always can be recognized as a conventional, incremental process (Oviatt and McDougall, 1994).

Assumptions of the Uppsala Model

Uppsala Internationalization Model:

1. Origins of the Model:

   • The Uppsala Internationalization Model originated from case studies of Swedish producers conducted by Johanson and Wiedersheim-Paul in 1975.

2. Behavioral Perspective:

   • The model adopts a behavioral viewpoint, focusing on how firms behave when expanding internationally (Andersen and Buvik, 2002).

3. Motivating Force:

   • According to the model, a firm's market knowledge is the driving factor behind its internationalization journey.

4. Market Understanding:

   • Market understanding is crucial and is influenced by the "psychic distance" between the home country and the target country.
   • The firm's deep experience in each market also plays a significant role.

5. Selection of New Countries:

   • The model asserts that firms choose new countries for expansion based on their psychic proximity to the home country.

6. Expansion Path:

   • Firms tend to start with countries that are closer in terms of "psychic distance" and gradually move to more distant countries.

7. Resource Commitments:

   • As the firm gains experience in each market, the level of resource commitment in each selected country increases gradually.

8. Incremental Steps:

   • The model emphasizes that internationalization is a step-by-step process, with firms taking incremental steps in terms of market distance and resource commitment.

Relevance of Services in International Trade

Significance of Services in the Global Economy:

1. Contribution to World GDP:

   • Services play a crucial role in the world's Gross Domestic Product (GDP), representing a significant portion.

2. Share in International Trade:

   • Services also hold a substantial share in international trade, indicating their importance in the global economic landscape.

3. Growth of Internationalization:

   • The internationalization of services has been rapidly increasing, marking a significant trend in the business world.

4. Historical Perspective on FDI:

   • In the 1970s, services accounted for approximately 25% of the world's Foreign Direct Investment (FDI) stock.

5. Shift in FDI Trends:

   • By the early 2000s, the share of services in FDI stock increased to 60%, reflecting a notable shift in investment trends.

6. FDI Inflows:

   • Historical data reveals that services constituted two-thirds of FDI inflows, underlining their growing importance in global economic activities.

Variables affecting the Internationalisation of Services

Factors Influencing Service Firms' Entry Modes:

1. Erramilli's Investigation (1990):

   • Explored entry mode choices in service industries.
   • Found that hard services firms, where production can be separated from consumption, opt for similar entry modes as product firms.
   • Soft services firms, where production and consumption occur simultaneously, prefer more integrated entry modes.
   • Customization needs drive service firms toward more integrated entry modes.

2. Ekeledo and Sivakumar's Support (1998):

   • Supported Erramilli's argument, highlighting significant variations in entry mode decisions between hard and soft services.
   • Noted similarities between hard services and commodities.

3. Cloninger's Determination (2000):

   • Found that less vague, perishable, and concurrent services have a higher likelihood of internationalization.
   • Identified intangibility as a predictor of entry mode.

4. Erramilli's Study on International Experience (1991):

   • Examined the impact of a service firm's international experience on foreign country and entry mode selection.
   • Discovered that as service firms gain experience, they expand to more psychically distant countries.
   • Noted a U-shaped relationship between experience and control of entry mode.

5. Sanchez-Peinado and Pla-Barber's Findings (2006):

   • Cultural distance did not extensively influence entry mode choice for service firms.
   • Found a negative relationship between international experience and higher-control entry modes, challenging Uppsala's predictions.

6. Focus on Specific Service Industries:

   • Researchers concentrated on individual service industries to address differences across sectors.
   • Examples include studies on business services, engineering consulting, financial services, hospitality, professional services, and software.

7. Andersen's Assertion (1993):

   • Differences between models reflect semantic variations, not fundamental distinctions in the internationalization process.
   • Firms are expected to progress from low to high commitment modes and enter new markets with increasing psychic distance.

8. Challenges to Traditional Models:

   • Many studies highlight the rapid internationalization of new firms, deviating from traditional slow-stage processes.

9. Resource-Based View (Javalgi and Martin, 2007):

   • The resource-based view of the firm is used to analyze competitive advantage in service marketing and management.

Mode of Entry

1. Client-Following Mode:

   • Service firms follow manufacturers they serve into their home markets.
   • They expand their services to the domestic market of manufacturers they supply.

2. Market-Seeking Mode:

   • Service firms explore international markets to expand their business.
   • They actively seek new markets abroad to grow their services globally.

3. Electronic Marketing Mode:

   • Modern technology offers new avenues for internationalization.
   • Service firms utilize electronic platforms to market their services internationally, capitalizing on technological advancements.

Export Strategies

Strategies for Internationalizing Services:

1. Direct Export:

   • Service firms directly export their services to foreign markets.

2. Systems Export:

   • They export service systems or models to be implemented in foreign markets.

3. Direct Entry:

   • Service firms establish a direct presence in foreign markets through subsidiaries or branches.

4. Indirect Entry:

   • They enter foreign markets through partnerships, joint ventures, or licensing agreements.

5. Electronic Marketing:

   • Service firms leverage electronic platforms for marketing and expanding their services globally.

Barriers / Challenges to Internationalisation

1. Barriers in Internationalization (Czinkota, 1994):

   • In both initial and later stages of internationalization, it's crucial to identify and address barriers.
   • Experience and knowledge in international business help, but newcomers and born global companies may face similar challenges.

2. Considerations Before Entering Foreign Markets (Quer et al., 2007):

   • Assess social, legal, economic, and political aspects of a foreign country before considering entry.

3. Learning and Adaptation (Craig and Douglas, 1996):

   • The ability to learn about international markets, customers, and operations in unfamiliar environments is a key factor in successful internationalization.

4. Obstacles in Internationalization (Winstead and Patterson, 1998):

   • Challenges include resource constraints, limited knowledge about exporting, and concerns about cultural differences complicating the process.

5. Unique Challenges for Service Firms:

   • Most literature on internationalization focuses on manufacturing firms, posing challenges for service firms.
   • Limited understanding of how service firms enter foreign markets, with little practical support for theoretical concepts.

Summarizing Internationalization:

1. Implementation and Evaluation of Strategies:

   • Globally operating companies must implement and assess internationalization strategies.

2. Diverse Theories and Tools (Various Researchers):

   • Researchers offer different tools and theories to explain firm internationalization, providing varied suggestions for adapting to this dynamic environment.

3. Vital Role of Service Industries:

   • Service industries play a crucial role in connecting geographically dispersed economic activities.
   • They contribute significantly to the growing interdependence of markets and production activities across nations.