Internationalisation and Strategic Control

An Industrial History

Morten Pedersen

• Publisher: Routledge
• Year: 2021
• ISBN:
  9780429820939
• Edition: 1
• Topic: Business
• Subtopic: International Business
• Index: Business

This book is a study of the emergence of international business. It immerses itself in the topic of how companies can control income-generating assets in foreign countries, the key element often used to define a multinational enterprise, and propounds the notion that control of crucial dispositions by foreign companies can be achieved by other means than direct foreign investment – cash flow and portfolio ownership.

Internationalisation and Strategic Control analyses the extent to which a firm can control the investments of foreign companies in the field of supply and maintenance of production machinery. It achieves this through a case study of how F.L. Smidth & Co., global leaders in providing technology for the cement industry since the 1890s, managed to achieve a vital influence over, and control of, cement-producing companies in Asia in the period 1890-1938. The study examines how this strategy was promoted by some internal and external factors and circumstances, and hindered by others.

In highlighting strategic tools and initiatives other than cash flow and portfolio ownership, the book applies concepts taken from a broad range of research fields covering social science, cultural analysis, micro history, Actor-Network-Theory and industrial archaeology. It will be of interest to researchers, academics, and students in the fields of international business, business history and globalisation.

1 The Emergence of International Business: Concepts and Approach

DOI: 10.4324/9780429446184-1

Multinational Enterprise

It is a well-known fact that the activities of companies across national borders and continents have always been a decisive factor in all phases of globalisation.¹ Therefore, it is not surprising that for decades, research in the history of companies, and particularly their internationalisation processes, has been one of the most fruitful tools for understanding globalisation and its driving forces.² Major interest has been directed towards the multinational enterprises that began to attract attention in the economic scholarly literature in particular in the 1950s and 1960s. In much early research, multinational enterprise was primarily seen as an American pursuit, but since the 1990s, the topic has been studied as a phenomenon taking its starting point in and directed towards nations across the globe.³

At the same time, a consensus was established to speak about enterprises as multinational when they control operations or income-generating assets in more than one country.⁴ This led to a strong focus on analyses of capital flows and formal ownership. The reason was that the use of direct portfolio investments by companies across national borders was seen as a particularly significant indicator of such control, i.e. investments linked to formal managerial control. Green field investments thus became classic examples of the establishment of multinational enterprise; in these, companies establish subsidiaries from the bottom in a country, or they invest in the purchase and takeover of companies that already exist.

The strong focus on FDI has been accompanied by the recognition that investments may well be important, but considered separately, they are a deficient indicator of situations in which the companies are controlling income-generating operations and/or assets across national borders. Rather than focusing narrowly on FDI as an indicator, it may be fruitful to take a broader look at the ways in which enterprise internationalisation may be dependant on – and even based on – other factors than the access to capital. Also across national borders, companies may be interconnected and influence each other’s dispositions in completely other ways than just through capital flows and formal ownership.

These types of connections may be formed in a number of ways, often overlapping and difficult to describe using the concepts normally drawn on in descriptions of companies and their interrelations, whether across national borders or not. In order to connect categories to real-life situations, research has therefore introduced a number of different terms. We may, for instance, point to the use of concepts such as nonequity arrangements to characterise licence agreements that transfer the right of use of a technology subject to certain conditions, franchise models, cartels or strategic agreements, etc. In combination, such phenomena have been highlighted as examples of how companies can establish obligations towards each other in ways that involve mutual control of the income-generating assets, leaving out any direct investments.⁵ A similar situation is seen in the introduction of categories such as business groups, where for instance large commercial companies diversify through contract-bound collaboration with other companies without making moves to buy up or merge, interfirm networks for even more decentralised, loose and perhaps occasional collaboration types, transnational firms and metanational firms.⁶

In other words, an interest in control opens the door to a complex world in which companies are interconnected and exercise control of each other’s activities in numerous overlapping ways, and where narrow economic and legal concepts and definitions are often inadequate.

The Gradual Internationalisation Process

The introduction of a broad understanding of control may challenge our usual understanding of the opportunities of companies to build relations, and consequently of companies as easily definable and autonomous phenomena.

It has long been known how companies can build their presence in foreign markets, gradually and over a long span of time. Since the 1970s, a model consisting of four phases has often been put forward as an example of how this might typically take place; this was known as the Uppsala model because it was formulated by the economists Jan Johanson and Jan-Erik Vahlne at the Uppsala School of Economics.⁷ On the basis of observations of the establishment of Swedish companies in other countries, primarily companies based on mass manufacturing of products for private consumers, the Uppsala model described a typical establishment chain, in which the company builds a solid position in the home market; based on this, it subsequently introduces international involvement in the shape of export/import activities, i.e. the sale and purchase of goods and services across national borders. In the second phase, transactions follow through contract-bound independent collaboration partners using agencies or licence agreements, until the company, in the third phase of internationalisation, establishes its own sales offices and organisations in the recipient country. Finally, the model described how the move into the last phase of internationalisation may be made by investing in the establishment of production facilities in the new market.

In other words, the Uppsala model described a process in which multinational enterprise based on direct investment constituted the final objective and the completion of the strategy of a company towards fully expanded international activities.

The trend towards such gradual development may indeed be explained through the set-up of basic simple explanatory models which may almost seem like natural science laws, and which are focused on how companies in foreign markets are facing a liability of foreignness, i.e. the condition that, as a point of departure, companies coming from outside have a weaker position than the national companies, which are acting with ease in well-known contexts.

The market knowledge gained through sales contacts may thus create knowledge about market potential and may form the basis for overcoming the first important step in the liability of foreignness. This may create fertile soil for new investments, which can create enough volume to make use of the opportunities – resulting in further knowledge of the new market. In other words, investments may promote a cyclical development where increasing investments lead to increasing market knowledge and an organisation with the strength to make use of the potential, which may result in even more knowledge. Another type of event chain may be sparked by increasing transaction costs.⁸ An increase in international activities may involve such great risks in foreign markets – another type of liability of foreignness – that it is better and cheaper to integrate the activities through the company’s own multinational organisation by establishing offices and factories. This may then result in increased activity, new risks, new investments, etc.

Since the Uppsala model was launched, research has demonstrated how the four phases have been nicely followed by large companies such as Singer and Lever Brothers.⁹ It has also been demonstrated, however, that companies in the real world often globalise according to more complex patterns that cannot be described and understood through the four phases of the simple standard model.¹⁰ Not least Johanson and Vahlne themselves have formulated this recognition; as part of the explanation, they have pointed out how the internationalisation of companies is not only driven by the simple almost lawful mechanisms originally described in the model.¹¹

Actually, it follows from the changed and more network-oriented understanding since the 1970s of the characteristics of a market that there is more to it than overcoming the liability of foreignness when companies wish to set up business in foreign markets. Therefore, it is also relevant for the companies to work through other channels and use other tools than those involved in gradual phase-building supported by multinational investments. Whereas a previous more classic market understanding presented an arena with independent suppliers and customers, this image has, since the 1990s, to a large extent been abandoned in favour of a view of markets – as formulated by Johanson and Vahlne – as more or less boundless “networks of relationships in which firms are linked to each other in various, complex and, to a considerable extent, invisible patterns”.¹²

In this image of the market, the liability of foreignness is not a company’s primary challenge. Rather, this is constituted by the absence of network embeddedness, which may impede the opportunities to establish and control the desired activities, i.e. the liability of outsidership. The road to success is therefore more likely to run through the creation of relations which may contribute with the necessary and controllable competitive advantages. Such relations may be built through classic investments, but it must be expected that network embeddedness is often created at completely informal levels in which political, cultural and social structures combined with intentions, expectations and interpretations among individuals and groups are key parameters. In other words, conditions that are not easily captured for analysis through approaches focusing on capital, investments and formal ownership structures.

Therefore, it is easy to imagine how an analysis focusing exclusively on FDI can result in a faulty image of which relations have been established, and of the character of these – i.e. the internationalisation of the company. The more formal representation of the investments of a company – agencies, sales offices, production units, etc. – cannot necessarily be viewed as a direct reflection of the extent to which the strategic development of the company has been completed. The decisive factors required to build a market position may to an equal extent consist in more or less formal, not very transparent and rather unstable states of network embeddedness, in the character of the network and its position in the market, and in the opportunities to influence and control the activities in the network.

Born Globals

Another challenge to the image of the prolonged gradual internationalisation process with a fully developed MNE as its ultimate goal derives from the fast-increasing knowledge about companies that internationalise their activities early and at great speed, and which, during the past few decades, have become the subject of an independent research field termed born globals. A key question that directly springs to mind is, of course, how such companies can build their globalisation strategies without the prolonged establishment of a solid home market position in the first place, followed by gradual investments and infrastructures in the foreign markets.

Born globals’ roads to success – or failure – have attracted great attention, not least because both businesses and state and government bodies have attached great importance to this particular type of enterprise as regards the possibilities to create economic growth. This has resulted in a similarly increased focus on the attempts made by companies to build competitive advantages through network embeddedness and on their possibilities to make profitable use of these competitive advantages to establish and control income-generating assets globally. One reason is that there seems to be no general indication that the born globals are primarily seeking to realise themselves as large monopolistic multinational companies. Rather, they tend to operate within so-called business ecosystems consisting of both large well-established multinational companies and younger less well-resourced, but creatively knowledge-operated companies that expand globally at great speed – i.e. born globals.¹³

Thus, born globals seem to be primarily characterised by being driven forward by entrepreneurs/individuals operating at high, specialised technological knowledge levels which they are seeking to translate into global utilisation of new business fields. This means that their activities are often characterised by great uncertainty and – inevitably, since they are new – based on untested and financially weak organisations. In other words, the companies are typically heading towards an uncertain future based primarily on how they imagine this to be. The need for clever strategising in order to reach their goal of establishing and controlling global market positi...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Contents
• List of Tables
• Acknowledgements
• Acronyms and Abbreviations
• Introduction
• 1 The Emergence of International Business: Concepts and Approach
• 2 The Modern Cement Industry: Its Emergence and the Role of F.L. Smidth & Co.
• 3 Like Living on an Island … Siam and Southeast Asia 1913–1925
• 4 When China Awakens … China 1890–1938
• 5 Samurai and Cement Factories. Japan 1922–1938
• 6 A Strategic Goal of Independence. India 1904–1938
• 7 A Robust Non-FDI Strategy
• Index