The role of internationalization knowledge in foreign expansions
By
Nout Slinkman
University of Groningen
Faculty of Economics and Business
Bsc International Business & Management
2
Table of content
1. Introduction 3
1.1 Validation of the subject 3
1.2 Contribution and conceptual model 4
2. Concepts 5
2.1 Knowledge 5
2.2 Internationalization knowledge 6
3. Research design 7
4. Knowledge role in entry modes dynamics 8
4.1 Knowledge role in entry mode 8
4.1.1 Knowledge role in export 8
4.1.2 Knowledge role in strategic alliances 9
4.1.3 Knowledge role in FDI’s 10
4.1.4 Knowledge role in different entry modes 11
4.2 Influence process of internationalization knowledge on entry mode 12
4.2.1 Acquisition internationalization knowledge 12
4.2.2 Transferability internationalization knowledge 14
5. Conclusion 15
5.1 Limitations 16
5.2 Further research 16
3
The role of internationalization knowledge in foreign expansions
Abstract: A significant gap in the literature is the lack of a comprehensive view of the knowledge in internationalization. How knowledge is actually acquired and disseminates in organizations? This paper shows the difference in importance of several aspects of knowledge in several foreign entry modes; export, strategic alliances and FDI’s. The different internationalization knowledge required in specific entry modes and the acquiring, storing, transferring and application of knowledge in entry mode dynamics are taken under the loop to see how internationalization knowledge influences the choice of entry mode. This will result in a general understanding of the crucial role of internationalization knowledge in international expansion.
Key words: internationalization, knowledge, information, acquisition, transfer, absorptive capacity, entry mode, export, FDI,
strategic alliance.
1. Introduction
The trend of accelerated internationalization is pushing through. While information and communication technologies keep improving, it seems reasonable to assume that the end of increasing internationalization is not near yet. Internationalization is also known as international entrepreneurship, which can be defined as the process of creatively discovering and exploiting opportunities that lie outside a firm’s domestic market in the pursuit of competitive advantage (Zahra and George, 2002). When considering expanding internationally, firms seek to find the right balance between risk and growth/increased performance. Both internal (e.g. price and quality product, qualified personnel, high costs internationalization) and external (e.g. lack of knowledge foreign market, lack of capital, lack of public support, etc.) aspects can be considered potential risks when going abroad. While going abroad can be beneficial for a bunch of reasons (efficiency, market and resource seeking), the gains need to outweigh the costs and risks. Although a person can conduct business anywhere in the time that it takes to get internet, and can virtually travel anywhere in the world in less than a day, knowledge of foreign markets is crucial to conduct successful business abroad. Internationalization knowledge is a key determinants of
internationalization; “knowing what knowledge is required in different situations and different settings connected with internationalization, and where to seek this knowledge” (Eriksson et al, 1997). The acquisition of appropriate knowledge is of critical importance to successful market entry abroad. Several types of knowledge can be identified, e.g. knowledge about the market, competitors, norms & values, retailer, culture, tariffs and institutional frameworks. This paper uses all facets of internationalization knowledge to shed light on the success of international expansions of firms, focusing on all aspects concerning knowledge in an internationalization perspective. The different types, and the acquisition and transferability of knowledge throughout the organization are all influential for the choice of entry mode, which leads us to the following research question;
How does internationalization knowledge influence the choice of entry mode in foreign expansions? Two sub questions are provided to explain the main research question more in depth:
4 1.1 The Validation of this subject
Internationalization has been a hot topic in literature recently, mainly because across the globe, with advances in information and communications technologies, the globalization of markets, and other facilitating factors, more and more firms are venturing abroad. Foreign direct investments have increased dramatically over the last few decades, both in relative and absolute terms (Barkema & Vermeulen, 1998). The increasing importance of internationalization (as a strategic tool) is a fact. A major influence on the literature regarding internationalization, has been the Uppsala model (Johanson & Vahlne, 1977). Although the increase in models and literature on the subject, there logically has been some critique concerning the state of knowledge of internationalization. Anderson’s (1993) critique is based on the fact that some models, e.g. the Uppsala model (Johanson & Vahlne, 1977) lack explanation of how or why internationalization arises, and the conditions that affect is unfolding. Recent papers suggested a need for deeper understanding of the determinants of internationalization (Wright, Westhead & Ucbasaran, 2007). A recognized major determinant of internationalization is the role of information and knowledge. It is ironic that there have been almost no studies that examine comprehensively the role of information and knowledge acquisition in the internationalization of the firm (Liesch & Knight, 1999). Furthermore, there continues to be a lack of understanding how knowledge actually develops and disseminates in
organizations (Karlsen et al., 2003). Although the literature of knowledge aspect of internationalization has been enlarged, the attempt for complete comprehension of the subject isn’t seen in most articles. As a result, the current state of the literature on the subject is hard to determine. Additionally, since the introduction of the ‘Born Global’ phenomenon, the role of knowledge in firms seems increasingly important.
Combining the lack of literature on the knowledge aspect of internationalization and the increasing internationalization of firms due to information and technology improvements, the validation of this subject seems to be proven valid.
1.2 Contribution and conceptual model
Recent papers suggested a need for deeper understanding of the determinants of internationalization (Wright et al. 2007). Knowledge of the foreign market
is one of these important determinants of
5 entry modes. By this twofold explanation, a clear view is hoped to be given on the role of
internationalization knowledge in entry mode dynamics.
This paper contributes in both the academic and practical sense.
- Academic contribution: The academic contribution of this article will be to develop a general consensus of the current literature in which all facets of knowledge are shown, and look at the influence of knowledge in different types of entry modes.
- Practicable contribution: This paper should give managers of firms an overview about the internationalization knowledge, with important issues managers could use practically. Additionally, internationalization knowledge in entry mode dynamics will be explained, providing implications for managers in the entry mode decision process.
2. Concepts 2.1 Knowledge
Causes of growth of a firm are important issues in the literature. Commonly accepted in the literature is the fact that knowledge plays an huge role in the growth of the firm. Although there isn’t one commonly used definition of knowledge, this paper will make use of the definition by the philosopher Plato; “justified true belief”. Next to this, there will be made a distinction between information and knowledge, although often used in the literature as one and the same. Information is “a flow of messages or meanings which might add to, restructure or change knowledge” (Machlup, 1983). These differences in definition of knowledge and information create a need for a clear definition of information asymmetry. This paper defines information asymmetry as a situation in which not all information is known to all parties involved. Well known is the fact that information asymmetry causes markets to be inefficient, since not all parties involved in the market have complete information for their decision making process.
Two main types of knowledge are explicit and tacit knowledge (Polanyi, 1966). In the paper of Nonaka (1994), the nature of information and knowledge and the distinction between "tacit" and "explicit" knowledge is discussed. “Explicit" or codified knowledge refers to knowledge that is transmittable in formal, systematic language, whereas "tacit" knowledge has a personal quality, which makes it hard to formalize and communicate (Polanyi, 1966). Knowledge is held by individuals, but is also expressed in regularities by which members cooperate in a social community (Kogut & Zander, 1992). The central competitive dimension of what firms know how to do is to create and transfer knowledge efficiently within an organizational context.
If knowledge is held by individuals, how will knowledge be transferred throughout a firm? Nonaka (1994) follows an distinction of two dimensions of knowledge creation, tacit and explicit knowledge. The author identifies four ways to transfer knowledge, namely internalization (explicit to tacit), externalization (tacit to explicit), socialization (tacit to tacit) and combination (explicit to explicit). The key for acquiring tacit knowledge is experience. Nonaka (1994) concludes with the statement “The theory explains how knowledge held by individuals, organizations, and societies can be simultaneously enlarged and enriched through the spiral, interactive amplification of tacit and explicit knowledge held by individuals,
organizations, and societies.”
6 imperative to increase organizational learning. Nonaka (1994) follows an distinction of two dimensions of knowledge creation; Organizational knowledge creation and individual knowledge creation. Thus,
organizational knowledge creation can be viewed as an upward spiral process, starting at the individual level moving up to the collective (group) level, and then to the organizational level, sometimes reaching out to the inter organizational level (Nonaka,1994). Additionally, the creation of new knowledge depends on what a firm knows when it encounters new knowledge and how it processes or assimilates the new knowledge (Autio et al., 2000). New individual knowledge is incorporated into organizational knowledge only when it is shared and is assimilated into organizational routines, documents, and practices (Cohen & Levinthal, 1990). Organizational knowledge is reinforced in all the activities of a firm and becomes increasingly calcified in organizational practices (Barkema & Vermeulen, 1998; Cohen & Levinthal, 1990)
Cohen & Lavinthal (1990) provide another important factor of knowledge, namely absorptive capacity, of which the authors suggest it is largely a function of the firm’s level of prior related knowledge. In their paper, they characterize the factors that influence absorptive capacity at the organizational level, how an organization's absorptive capacity differs from that of its individual members, and the role of diversity of expertise within an organization. Learning is most efficient in domains close to an existing knowledge base. Cohen & Levinthal explained that a firm's absorptive capacity, described as its ability to "recognize the value of new, external information, assimilate it, and apply it to commercial ends", depended on its prior, related knowledge and evolved in a history-dependent fashion as the firm accumulated (or failed to accumulate) knowledge critical to its later growth. They stated that the more similar prior knowledge is to new knowledge, the easier the absorption of the new knowledge. Furthermore, the adoption of new knowledge involves not merely the learning of the new, but the unlearning of the old (Bettis & Prahalad, 1995; Nonaka, 1994). Putting Cohen & Levinthal’s paper in context of internationalization, it would seem reasonable to assume that the overall knowledge of foreign markets helps in a single foreign market.
2.2 Internationalization knowledge
Over the last decades, a common view on types of knowledge in internationalization perspective is created. Penrose (1956) was the first to distinguish two types of knowledge, experiential and objective. In 1977, Vahlne and Johanson distinguished more specific types, namely business experiential knowledge and institutional experiential knowledge. Although Johanson and Vahlne (1977) assumed that relevant experience of a firm concern specific markets, it is generally recognized that is not the case (Johanson & Vahlne, 2009; Eriksson et al., 1997; Forsgren, 2002). Erikson et al. (1997) labeled this “accumulated” experiential internationalization knowledge, consisting of both business and institutional knowledge, which is not related to specific markets. Although not all relevant experience of a firm concern specific markets, being active in several different markets increases the overall experiential knowledge. Variations in the experiences a firm has in different markets is positively related to internationalization knowledge (Barkema & Vermeulen, 1998). Eriksson et al. (2000) suggested that variation of a company’s
international activities in terms of geographical spread is an important aspect of experience. Therefore, it can be argued that the more diverse the markets, the more experiential and thereby accumulated
7
Internationalization Knowledge
Objective knowledge Experiential knowledge
Business Institutional
Tariffs Clients Culture
Retailer Market Government
Market knowledge Competitors Institutional
frameworks
Public support Norms & Values
Table 1; Types of internationalization knowledge
Experience is the prime source of learning in organizations (Penrose, 1956). For most internationalization decisions, experiential knowledge is the most important determinant (Johanson & Vahlne, 1977). Since objective knowledge is easier to obtain and less vital to success of the international expansion, this kind of knowledge is of minor importance.
3. Research Design
This paper contains a qualitative literature review in the field of internationalization and knowledge. A sample of 23 articles concerning the link between internationalization knowledge and entry modes is used. This representable sample of sufficient size will ensure the quality and depth of this paper. To create a logical and comprehensive paper, articles will be structurally broke down and put in chronologically order, mainly focusing on the contribution of the article to the subject of this paper. Several criteria are used for inclusion in this review, namely;
1. The article is written in English
2. The source is a published journal or a professionally recognized report. 3. The articles collected form a representative set for the scope of this research.
4. The article’s results can be used to create generalizable outcomes concerning knowledge. The paper is structured starting with a view in the field of knowledge. In the main body of the paper a literature review is performed concerning the role of internationalization knowledge in entry modes, by looking at the process of internationalization knowledge in firms and the various types of knowledge. In the final part of this paper the conclusion is stated, and limitations and implications for further research are discussed. By focusing on all aspects of internationalization knowledge separately, the aim of clarifying the links between the knowledge aspects of internationalization is hoped to be reached. Since knowledge is invisible, the measurement (and its reliability) of internationalization knowledge is very hard. A literature review can be an efficient way to look at various aspects/views on a subject, which was very helpful is this paper. Since there was a significant gap in the literature concerning
internationalization knowledge, an overview of the role was needed in order to look at the role of
knowledge in entry mode dynamics. This literature review provides a better understanding what processes are involved in internationalization knowledge, and the different types of internationalization knowledge are identified. Although there is plenty good literature concerning entry modes, the link with
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4.1 Knowledge role in entry mode
The entry mode of an expansion internationally is an important decision, mainly since it determines the commitment of various resources. Several types of entry modes can be distinguished, wherein this paper focuses on export, strategic alliances and Foreign Direct Investments (FDI’s). By picking these relative wide classification of entry modes and thereby commitment, the role of knowledge can be better shown. Knowledge in international activities is crucial, and is strongly incorporated in the choice of entry mode. Different degrees of internationalization knowledge, defined by Erikson et al (1997) as knowing what knowledge is required in different situation and different settings connected with internationalization, are needed for different entry modes. The acquiring, storing, transferring and application of knowledge are all facets which contribute to the success of the international expansion, although importance depends on the entry mode chosen. Several theories discuss entry modes, of which probably the most known is the transaction costs (TC) model of entry mode. The TC model argued that the risk of exposure of knowledge to the threat of opportunism from licensees or partners would suggest the need to transfer knowledge within the firm or choose high-control governance structures. Protection of knowledge is shown a key aspect of entry mode dynamics.
4.1.1 Knowledge role in export
Some firms, especially those in the early phase of internationalization, suffer a lack of resources and international experiences. This limits the opportunities to learn from the internationalization process and have them exposed to higher uncertainty. For these reasons, some firms begin internationalizing with an entry mode of low commitment, known as the incremental approach. An common type of entry mode with a low amount of commitment is export. Exporting is selling your product in a foreign market, with obviously the primary aim of market-seeking.
The role of knowledge in exporting is limited. Objective knowledge plays an important role in the attitude towards exporting. Although objective knowledge is assumed to be easily obtainable (Johanson & Vahlne, 1977), opportunities can be spotted in foreign markets by obtaining objective knowledge. The more information is acquired about foreign markets, the more likely a firm is to export, since it can change the attitude of decision-makers (Wiedersheim-Paul et al., 1978; Adbul-Talib, 2011). Exporting requires a low amount of experiential knowledge. Although the possession of a knowledge base
comprising informational and experiential knowledge relevant to the market environment of the firm is an important source of competitive advantage (Morgan et al., 2003), it seems less crucial in export than in the case of a strategic alliance or a FDI. Mainly because of the fact that there is dealt less with the foreign market and their players, since firms in most cases use agent of distributors to represent their business abroad. In the area’s in which the firm is active abroad (e.g. marketing), experiential knowledge creates skills that allows more effective and efficient task accomplishment. Although exporting reduces the risks of a firm, the opportunities to obtain internationalization knowledge are limited. Since local presence and extensive networks are non-existent, and the diversity and intensity of knowledge is low, international experience will not dramatically increase and learning will go slow.
9 knowledge isn’t particularly relevant for an exporter, this experiential knowledge will most likely not be required nor obtained. Business experiential knowledge does help the role of the exporter, since if firms deal with the foreign market, experiential knowledge creates more efficient task accomplishment. 4.1.2 Knowledge role in strategic alliances
Strategic alliances can be seen in a variety of forms, such as equity joint ventures, license agreements and joint development agreements. A strategic alliance can be formed with different aims, such as to decrease costs (e.g. R&D), reduce risks and obtain access to scarce resources. Another reason to start a strategic alliance is to acquire technological capabilities from partner firms. Cooperation becomes a low-cost route for new competitors to gain technology and market access (Hamel et al., 1989). The greatest risk of strategic alliances is the exposure of knowledge. For this reason, the transaction cost model argued that the risk of exposure of knowledge to the threat of opportunism from licensees or partners would suggest the need to transfer knowledge within the firm or choose high-control governance structures.
As previously mentioned, internationalization knowledge is knowing what knowledge is required in different situations and different settings connected with internationalization, and where to seek this knowledge (Eriksson et al, 1997). As far as internationalization knowledge in a foreign strategic alliance, including the important technological knowledge, experiential business and institutional knowledge is already possessed by the foreign partner. This knowledge could be gained by intercompany knowledge transfer and/or by the exposure to the foreign country by the firm itself. Objective knowledge is easily obtainable, and assumed is that the firm will not have any problem gathering this knowledge. Inkpen (1998) stated three kinds of knowledge, all experiential. First, how to design and manage strategic alliance. Second, some firms may start an alliance to get access to other firms’ knowledge, but will not make use of this knowledge in internationalization perspective. Third, alliance knowledge is of crucial importance to learning and knowledge acquisitions in international strategic alliances.
10 capacity (Cohen and Levinthal, 1990) in the acquisition of capabilities through alliances. Meaning that experiential knowledge in related technological areas is an important determinant of absorptive capacity. Some literature state that foreign market entry should not be studied as a decision about modes of entry, but should instead be studied as a position-building process in a foreign market network. Strategic alliances can be used for this purpose. By first learning from the alliance, experiential knowledge will be gained and firms could potentially successfully manage the foreign expansion by themselves.
Experiential business and institutional knowledge is already possessed by the foreign partner in the case of strategic alliances, which could be gained by either intercompany knowledge transfer and/or the exposure to the foreign country by the firm itself. The value of the knowledge possessed by partner and the accessibility of the internationalization knowledge play a significant role in the success of the strategic alliance. Additionally, also previous alliance knowledge improves the performance of the firms.
4.1.3 Knowledge role in FDI’s
A FDI is a direct investment in an international context. With international mergers & acquisitions accounting for eighty percent of foreign direct investment, the paper will focus mainly on M&As. In recent decades, acquisitions have become the primary mode of entry in terms of value, and are considered the fastest way to build a foreign presence. Although very costly and hard to manage, M&A’s provide the advantages of better learning possibilities, increased market shares and efficiency, and possibility of obtaining resources. These high-control governance structures also have the advantage of protection of knowledge, known as a critical factor of entry modes dynamics.
Well known is the fact that many mergers and acquisitions fail, more than any other entry mode. Underestimation of complexities of foreign acquisitions and the importance of experience are the primary reasons. Several stages of M&A’s are distinguished by Kongpichayanond (2009), namely the pre-M&A stage, due diligence stage, integration stage and the post-M&A stage. Before entering a merger or acquisition, countries and candidates need to be checked. Either by objective knowledge, or by experience, to see where opportunities can be found.
In the due diligence stage, this transaction will be checked and the completion of the merger or acquisition will be conducted. The third stage is the most crucial in M&A’s, the integration stage, in which the effective transfer of knowledge is key. Synergies in M&A’s depend on the firm’s ability to transfer knowledge to the acquired or merged unit. Transfer of knowledge depends on several factors, mainly the degree of previous experience of transferring knowledge of firms, the transfer capability, international experience, and psychic distance. Nadolski & Barkema (2007) showed that firms can gain from experience from foreign acquisitions, domestic acquisitions and joint venture experiences, building accumulated international experience. Since exposed to all knowledge facets of the foreign country, generally knowledge will obtained much quicker than in export and strategic alliances. They note that firms should be cautious for biased experiences, and learn what part of their knowledge to apply in new settings. Yildiz & Fey (2010) looked at the compatibility of new knowledge and organizational
unlearning, stating that “the success of knowledge transfer depends on the extent to which these practices are compatible with recipients units’ needs, interpretations of prior experiences and existing values. If this compatibility is lacked by the firm”, Yildiz & Fey (2010) argue that firms should unlearn those parts which cause incompatibility. Psychic distance can be decreased by extended internationalization
11 In the ongoing post M&A stage, the knowledge which was acquired and transferred needs to be applied in a proper way. Again, international experiential knowledge can improve this process. Nadolska & Barkema’s (2007) paper showed that the frequency of acquiring abroad increases with a company’s experience, suggesting that experiential knowledge about foreign markets shows to potential of acquisitions. Additionally, they found an U-shaped relationship between acquisition experience and performance was found.
With this high-control governance structure, all sorts of internationalization knowledge are crucial for the success of the M&A. Both the easily-obtainable objective knowledge, as the experiential knowledge is important. The effective knowledge transfer is needed for synergies and performance in the company. Experiential knowledge need to be transferred by both “sides” of the merger or acquisition, which is both the business knowledge and the institutional knowledge.
4.1.4 Knowledge role in different entry modes
# Study Journal Topic Research method
Main findings/implications
4.1 Wiedersheim Journal of Int. -Paul et al. Business (1978) Studies
Pre-export empirical data
activity from surveys . (75 Austr. Firms)
Objective knowledge key for identifying threats and opportunities
Morgan Decision et al. Sciences (2003)
Experiential and data derived Information knowledge from in export ventures questionnaires
Experiential knowledge improves efficiency and effectiveness of the firm in export
Abdul-Talib Advances in Et al. competitiveness (2011) Research
Effects firm size and data derived Int. experience on from Export attitude questionnaires
Experiential knowledge has a positive effect of the attitude towards export
4.2 Inkpen Academy of (1998) Management Executive
Learning and knowledge data from Acquisition in int. interviews and Strategic alliances literature review
Alliance knowledge crucial and the role of protectiveness and tacitness in knowledge accessibility
Inkpen Journal of (2000) management studies
Knowledge acquisition literature In joint-ventures review
The role of knowledge acquisition in joint ventures is crucial for increased performance of firms
Mowery Strategic Et al. Management (1996) Journal
Strategic alliances and data analysis Inter-firm knowledge (derived from Transfer U.S PTO)
Inter-firm knowledge needs to be shared in order to be successful in a strategic alliance
Hoang & Academy of Rothaermel Management (2005) Journal
General and partner-specific data analysis Experiences on performance 43 firms Joint-ventures (pharm.)
Partner-specific and general alliance knowledge have a significant impact on the performance of firms
4.3 Yildiz & Scandinavian Fey Journal of (2010) Management
Knowledge transfer literature In mergers & acquisitions review
To achieve synergies and performance, effective transfer of knowledge is needed
Nadolska & Journal of Int. Barkema Business (2007) Studies
Learning in mergers & data firms Acquisitions listed on AEX
Objective and experiential knowledge all needed in M&A’s Kongpich- Advances in
ayanond developing (2009) human resources
Knowledge management literature and Competitive advantage review In M&A’s
Different stages M&A are shown, and the importance of knowlege in these stages
Barkema & Academy of Vermeulen Management (1998) Journal
Learning through start-ups data analysis And acquisitions 25 Dutch firms
Multinational diversity and product diversity provide learning
opportunities for the firm Zahra Academy of
Et al. management (2000) Journal
International expansion by data analysis New venture firms 341 questionnaires
Role experiential technological learning is important in entry modes, especially in strategic alliances and M&A’s
12 Concluding, the original stock of knowledge a firm possesses when entering a foreign market is crucial. The efficiency of acquisition and transferability of internationalization knowledge increases as
commitment and exposure (and thereby experience) to the foreign market goes up. The higher the knowledge intensity the firm has endured in previous foreign expansions, the faster the pace of
internationalization. It is safe to assume that the higher the control of the governance structure, the more internationalization (experiential) knowledge is needed prior to the foreign expansion (and the more will be gained) to be successful abroad. In addition, also the knowledge and experience of dealing with a specific entry modes increases the likeliness of succeeding in foreign expansions. For export,
internationalization knowledge is critical to acknowledge opportunities and threats in foreign markets. Furthermore, if the firms deals with the foreign market, experiential knowledge creates more efficient task accomplishment. Experiential business and institutional knowledge is already possessed by the foreign partner in the case of strategic alliances, which could be gained by either intercompany knowledge transfer and/or the exposure to the foreign country by the firm itself. Learning from internationalization knowledge is key for successful strategic alliances. For mergers & acquisitions, all facets of
internationalization knowledge seem important, since firms deal with the foreign market completely by itself. However, the transfer of knowledge from the merged firm/acquired firm also seems critical. In mergers & acquisitions, synergies and performance are achieved by effective knowledge transfer.
4.2 Influence process of internationalization knowledge on entry mode
The process of internationalization knowledge is seen as the acquiring, storing, transferring and application of knowledge. For entry mode dynamics, especially the acquisition and transferring of knowledge are key aspects. The knowledge is mostly stored in the firm’s routines and programs, whereas the application is the use of the obtained knowledge. Although all aspects of the process are assumed important for each entry mode, some are more critical in certain entry modes than others. Therefore, experience in certain areas of the internationalization knowledge process determine synergies and performance.
4.2.1 Acquisition internationalization knowledge
Johanson & Vahlne (1977) assumed in their Uppsala model that knowledge was to be found in
13 spread, diversity of knowledge, innovation, local presence and variation of markets. Erikson et al. (1997) indicates the importance of three roads to experiential knowledge; local presence, repetition and variation. Being active in an increasing variety of markets and environments, the more experience will be gained. The greater diversity in the knowledge of owners, managers and employees contributes to a richer knowledge structures at the firm level and stronger technological capabilities. Innovation and diverse international markets stimulate the experience and knowledge of the firm (Barkema & Vermeulen, 1998). Erikson et al. (2000) argue that the closer the relation between the foreign environment and a firm’s stock of knowledge, the more applicable the knowledge will be abroad and therefore the more rapid the
internationalization process.
The importance of networks on the acquisition of internationalization knowledge has been a hot topic of debate in the last decades. Several factors explain the increasing research on this topic, of which the fact that an increasing amount of firms follows their customers or suppliers abroad is a large factor. The degree of networks of a firm influences efficiency and effectiveness of knowledge acquisition, since variation of markets, diversity of knowledge, geographical spread, local presence and innovation are all considered partly factors of these networks. Firms with limited exposure in terms of clients, products, technology, customers, institutions, etc. have low order single looped learning processes (Erikson et al., 2000). The goal of a firm should achieve their goals by double loop learning from experience, for which variation is key (Argyris and Schon, 1978). Karlsen et al. (2003) showed that inward activities play a huge role in the knowledge acquiring of firms. Inward activities such as purchases of machinery and procurement of raw material provide opportunities for firms to build relations (networks) with foreign actors. By making active use of the knowledge they acquire through these inward activities, firms are able to start or extent their outward activities (export, FDI, etc.) more efficient and with more knowledge. For the knowledge acquisition and transfer of a firm, the creation and transfer for deeper foreign market penetration is shown (Karlsen et al., 2003). Erikson et al. (2000) conclude that variation in foreign environments has positive effects on knowledge of a firm.
There are several shortcuts to acquiring internationalization knowledge. Autio et al. (2000) and Peterson et al. (2003) looked at the role imitability in (technological) knowledge. Some argue that sustainability of competitive advantages is dependent on the ability of other firms to replicate/copy knowledge. Most typical this involves technological knowledge. This type of knowledge is extremely tacit knowledge, which is incorporated in the core competences of a firm. If this knowledge can be imitated, the benefits offered will decrease. However, replicating tacit knowledge is difficult and costly. Internationalization increases most firms exposure to imitation. This leads to the conclusion that firms need to determine whether threats of imitability are worth going abroad, especially for high-tech firms. Furthermore, firms are able to hire people with international experiential knowledge. Attitudes that determine international decisions are shaped by the experiences of decision makers. Managers can make these so called shortcuts to acquiring crucial experiential knowledge by recruiting individuals with valuable international knowledge from other companies organizations (Barkema &Vermeulen, 1998). Many ‘born global’ firms are successful because the people starting the company have the much needed international experience. Sapienza et al. (2006) conclude that to some degree, firms can substitute for lack of organizational experience with managerial experience. Although transferability of knowledge
throughout the company is still of crucial importance, it can be concluded that firms can acquire experiential knowledge by hiring internationally experienced staff.
14 service firms, the authors show that lack of internationalization knowledge influence the lack of business and institutional knowledge. This lack of business and institutional knowledge, influences the perceived cost of internationalization. Costs originate from activities and presence abroad. Collecting, encoding, transferring and decoding knowledge are the knowledge related costs which arise from
internationalization. Pared with internationalization are often changing structure, processes and routines in the organization, which also entail costs. Pedersen et al. (2001) shows that firm may codify knowledge when transferring it to other units of the firm. A wrong choice in such a transfer mechanism may result in high communication costs. So not only in acquisition of knowledge are costs, also the transfer of
knowledge is costly. In transferring knowledge throughout the firm, firms need to make a choice in fit between costs and efficiency. Several transferring methods can be distinguished, such as face-to-face communication and written media. For objective knowledge, written media is the most-used method, since it less costly. Experiential knowledge can be best transferred by face-to-face meetings, which are more efficient, but also more costly. In international context, cultural barriers , differences in language and psychic distance can increase such costs.
As stated earlier, although important in each entry mode, the acquisition of internationalization
knowledge is most important in strategic alliances. Since a firm in a strategic alliance is exposed to the foreign market, acquisition of internationalization knowledge will be much faster than in the case of export. The acquisition can be more efficient by the exposure to foreign networks, larger geographical spread, higher diversity of knowledge, innovation, local presence and variation of markets. Short-cuts can be found by hiring internationally experienced staff or copying the partner. The partner mostly possesses lots of these efficiency increasing factors, so the accessability of these networks and knowledge helps firms to faster obtain knowledge. Since a lot of the internationalization knowledge needs to be gained by intercompany cooperation, the acquisition through this exchange needs to be optimal. To gain optimally from the alliance, both parties need to share information and knowledge (win the knowledge race). 4.2.2 Transferability internationalization knowledge
The biggest problem of transferability of internationalization knowledge that is acquired through experience in a market is that it often is tacit knowledge linked to the person involved in the specific events. Although the extend of this is unclear, it is clear that in order for the organization to be able to utilize this information, it needs to concert that individual knowledge into organizational explicit
knowledge (Nonaka, 1994). According to Nonaka (1998), organizational knowledge creation takes place in a knowledge spiral where individual tacit knowledge is converted into explicit knowledge and then into organizational knowledge. Only then the organization as a whole can fully benefit from the knowledge acquired in the market. When adopting new knowledge, it does not only involve the learning of the new, but also the unlearning of the old (Nonaka, 1994). Knowledge regeneration is extremely important to a firm’s growth.
15 amount of networks involved in the internationalization of a firm. When entering a foreign market, experiential knowledge is obtained and stored in the firm’s routines and programs. A firm needs to find a good fit between its structure and routines and their internal capabilities and resources, which will help them transfer experiential knowledge more efficient.
Furthermore, part of experiential learning is the ability to improve the absorptive capacity. Cohen & Levinthal (1990) came up with a new perspective on learning (and innovation). The term absorptive capacity was developed; the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends. The authors argue that the ability of an individual to evaluate and utilize knowledge is largely a function of prior related knowledge. Next to experiential knowledge, also the role of diversity of expertise has a large influence on the absorptive capacity. Thus, the absorptive capacity is path-dependent and firm-specific. Learning is always to some extend
constrained by the flow of information between individuals in the firm, the lower the constrains, the more optimal.
The transfer of internationalization knowledge is key in Mergers & Acquisitions. Synergies in M&A’s depend on the firm’s ability to transfer knowledge to the acquired or merged unit. Transfer of knowledge depends on several factors, mainly the degree of previous experience of transferring knowledge of firms, the transfer capability, international experience, and psychic distance. This shows that previous transfer experience of internationalization knowledge, either by strategic alliance experience or (preferably) M&A experience, is crucial for the success of M&A’s. Nadolska & Barkema’s (2007) showed the U-shaped relation between acquisition experience and performance, of which is assumed that the role of knowledge plays a huge role.
5. Conclusion
To answer the main research question of this paper, how does internationalization knowledge influence the entry mode in international expansions, the general consensus on internationalization knowledge needs to be shown. Two main types of internationalization knowledge can be recognized, namely objective and experiential, where experiential internationalization knowledge can be either business or institutional knowledge. International experiential knowledge is key international expansion, since acquiring new knowledge and learning is mainly experiential by nature. “Knowledge is shared and is assimilated into organizational routines, documents, and practices” (Cohen & Levinthal, 1990). These improved skills that allows more effective and efficient task accomplishment. Internationalization
knowledge plays a significant role in the entry mode choice. As this paper distinguishes three broad types of entry modes, namely export, strategic alliances and mergers & acquisitions, the role of
internationalization knowledge is examined. The stock of internationalization knowledge the firm possesses, which influences the decision and the internationalization knowledge which will be gained from different entry modes. First, the different internationalization knowledge was examined for each entry mode. Second, the influence of the process of internationalization knowledge on different entry modes is shown. By this twofold explanation, the role of internationalization knowledge in entry mode dynamics can be shown.
16 with the foreign market, although limited, experiential (business) knowledge creates more efficient task accomplishment.
In strategic alliances, experiential business and institutional knowledge is possessed by the foreign partner. This knowledge could be gained by either intercompany knowledge transfer and/or the exposure to the foreign country by the firm itself. Although a firm doesn’t has to have all internationalization knowledge, alliance knowledge improves the performance of the firm. The acquisition of
internationalization knowledge is extremely important in strategic alliances, depending on the value of partner knowledge and the accessibility of this experiential knowledge. The acquisition can be more efficient by the exposure to foreign networks, larger geographical spread, higher diversity of knowledge, innovation, local presence and variation of markets.
In Foreign Direct Investments (mainly M&A’s) all facets of internationalization knowledge are important. Business and institutional knowledge isn’t provided by a partner, but needs to be a transferred throughout the firm, since in the merged firm/acquired firm this knowledge exists. In mergers & acquisitions,
synergies are created by effective knowledge transfer. This effective knowledge transfer mainly depends on the experience in transferring knowledge, with could be gained by earlier international expansions. The relation between experiences in mergers and acquisitions (and strategic alliances) and M&A success is U-shaped (Nadolska & Barkema’s , 2007).These U-shaped learning curves suggest that when firms know which knowledge to apply in new settings (overcoming biased experiences), also the specific knowledge of entry mode helps in making the international expansion successful.
The efficiency of acquisition and transferability of internationalization knowledge increases as commitment and exposure (and thereby experience) to the foreign market goes up. Autio et al. (2000) showed that higher degree of knowledge intensity has a positive effect on firm growth and pace of internationalization. The higher control of the governance structure, the more internationalization knowledge will be gained. This paper has contributed to the literature in two ways. First, the general consensus is shown regarding internationalization knowledge. Additionally, the clear link between knowledge and entry modes is shown by the extensive literature review. These two contributions could also have implications for use in practice; managers can obtain a better understanding of knowledge in an internationally expanding firm, and the role of knowledge in these entry modes can be used to make more optimal decisions regarding the strategy of internationalization.
5.1 Limitations
The major limitation of this paper is the fact that some assumptions are just theoretical, and hard to be empirically proven. Although it is generally accepted that knowledge is critical in international business, the extent is hard to measure. Since knowledge is invisible, the extensive literature review in some cases does not provide empirical evidence concerning the link between internationalization knowledge and organizational performance. Since this literature review relies on the availability of these empirical studies, it is hard to empirically show the relation between knowledge and performance.
5.2 Further Research
17 knowledge and performance. This could best be achieved by looking at the process of internationalization knowledge, by linking this processes to empirical research. Examples could be deeper understanding of the factors which improve the acquisition and transfer of internationalization knowledge. For instance, the influence of networks, variation, diversity, etc on the acquisition of knowledge and performance.
Additionally, in further research the relation between entry modes and internationalization knowledge could be tried to measured. The steps in increasing commitment in foreign entry modes (export Strategic alliance M&A), how does a lack of internationalization knowledge influence the
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