Modes of internationalisation and arbitrage features

Modes of internationalisation

The different modes of internationalisation can be classified into two: transaction and direct investment modes with the latter requiring higher levels of resource commitment. Transaction modes include exporting, licensing, franchising, joint ventures, and wholly owned subsidiaries (Chen and Mujtaba, 2007). Exporting involves sale of products across national boundaries. It requires very low level of investment even though it results in high transportation and shipping costs. Licensing involves the creation of a working arrangement with partners in a foreign market. Licensing helps in ensuring that there is synergy between the partner organisations where competencies in local markets can be exploited while sharing financial risks (Chen, Griffith and Hu, 2006). Companies such as IKEA are known to have embraced franchising (a form of licensing) in their international expansion strategies with an aim to leverage on operation costs and exploit the competencies of their franchisees (Chaletanone, 2008).

Despite the advantages of franchising, there is always the risk of the franchisee breaking off the arrangement and exploiting competencies of the organisation to their disadvantage. Joint ventures involve substantial investments between two partners with the venture often being a separate organisation from the parent organisations with a distinct management team (Chen and Mujtaba, 2007). Even though it leverages on costs, there is always the risk of fallout between the partners hence leading to inefficient operations. Wholly owned subsidiaries grant the organisation full control enabling effective execution of global strategies. However, it requires a huge capital outlay and the organisation bears the whole risk.

The custom in the international expansion process is the use of internationalisation modes in an incremental approach as described in the Uppsala model where additional resource commitment is preceded by acquisition of knowledge through engagement with the market (Johnson, Scholes and Whittington, 2011). This means that alternative expansion modes are useful in providing information arbitrage as well as other forms of arbitrage.

Arbitrage strategies

Different internationalisation modes are useful for different arbitrage strategies. Information arbitrage helps overcome the lack of information about a local market (Johnson, Scholes and Whittington, 2011). It is achieved by entering into partnerships with local players with sufficient knowledge and experience in a market. It is only after sufficient knowledge has been gained that it is prudent to pursue direct ownership of subsidiaries. Joint ventures also help in reducing the risk exposure in terms of the likelihood of losing investments.

The international companies can also use different modes to arbitrage on the taxes accruing to them (Chen and Mujtaba, 2007). This depends on different local laws where joint ventures can be used in the event that local companies are faced with favourable taxation rules. Global economies such as bulk sourcing and creation of global brand identities are enhanced by ensuring that international subsidiaries are either fully owned or licensing arrangements allow for such global approaches (Johnson, Scholes and Whittington, 2011). The organisation can then minimise its operational costs while ensuring that competencies developed in one country can be applied to other subsidiaries hence leading to higher profitability.

Focus on arbitrage to encourage global synergy while minimising risks and operational costs therefore plays a critical role in guiding the choices on modes of internationalisation.

References

Chaletanone, W., 2008. Internationalization of IKEA in the Japanese market and Chinese markets. (Online) Available at: http://www.diva-portal.org/smash/get/diva2:121496/FULLTEXT01.pdf (Accessed 12 January 2014)

Chen, H., Griffith, D.A., Hu, M.Y., 2006. The influence of liability of foreignness on market entry strategies: An illustration of market entry in China. International Marketing Review 23(6), pp. 636-649

Chen, L.Y., Mujtaba, B., 2007. The Choice of Entry Mode Strategies and Decisions for International Market Expansion. Journal of American Academy of Business, Cambridge 10(2), pp. 322-337

Johnson, G., Scholes, J. and Whittington, K., 2011. Exploring Strategy. 9th Ed. Harlow: Prenctice Hall